No. 935 - SPECIAL COMMENTARY, ANNUAL REVIEW - PART ONE · Contents of today’s (February 12th) Special Commentary and Graphs are indexed and linked on page 6. _____ Three-Part Special

Copyright 2018 American Business Analytics & Research, LLC, www.shadowstats.com 1

No. 935 - SPECIAL COMMENTARY, ANNUAL REVIEW - PART ONE

Economic and Financial Review and Preview

February 12, 2018

__________

Did the Fed Trigger the Stock Sell-Off?

How Can the Economy Be Booming,

Given Ten Years of Ongoing Non-Expansion in Manufacturing,

Real Construction Spending, Housing Starts and Home Sales,

Domestic Freight Activity, Domestic Petroleum Consumption,

Real Consumer Credit (Ex-Federal Student Loans) and Given a

Decade of Stressed-Employment Conditions?

As Natural-Disaster Spending Boosts Wane, Stagnant

Economic Conditions Face a Renewed Tumble in Months Ahead

Renewed Downturn Could Trigger Resurgent Fed Pressures for

Expanded Quantitative Easing and Intensified Dollar Debasement

Budget-Deficit Issues Should Become Focus of the Currency Markets

Long-Range U.S. Economic and Financial-Market Health Depend on

Resolving Both Misdirected Policies of the Federal Reserve and

Intensifying U.S. Sovereign-Solvency Concerns of the Global Markets

Massive U.S. Dollar Selling, Debasement and Eventual Hyperinflation

Continue as the Primary Risks to Domestic Economic and Political Stability;

Precious Metals Remain the Proven and Established Primary Hedge to Same

__________

Shadow Government Statistics — Special Commentary No. 935 February 12, 2018


PLEASE NOTE: The next Regular Commentary on Friday, February 16th, will cover the January 2018

Consumer Price Index (CPI), Producer Price Index (PPI), Retail Sales, Industrial Production and New

Residential Construction (Housing Starts and Building Permits). The unusually-heavy concentration in

the timing of these major releases on February 14, 15 and 16 puts practical coverage of the large amount

of new and varied detail into one missive. Such also provides an opportunity for a coordinated

assessment of what should be shifting economic circumstances.

Best wishes — John Williams (707) 763-5786

_________________________________________________________________________________

Contents of today’s (February 12th) Special Commentary and Graphs are indexed and linked on page 6.

_________________________________________________________________________________

Three-Part Special Commentary: Today’s missive is Part-One of three. It provides a general overview of the U.S.

economy and financial markets. Part-Two will detail the financial condition of the U.S. Government, reviewing fiscal

circumstances, long-term sovereign-solvency issues and related inflation and financial-market concerns. That analysis is

planned in the week or two following release of the U.S. Government’s GAAP-based accounting for 2017, currently

scheduled for February 15th. Planned for early-March, Part-Three will review the stability and nature of the domestic

and global banking systems.

EXECUTIVE SUMMARY – ECONOMIC, FINANCIAL AND SYSTEMIC DISTRESS

Financial Markets Face Continued Turmoil, the Economy Faces Renewed Downturn

Stock Prices Plunged in Response to Rising Interest Rates and Treasury Yields (Bond Selling), but

Guess Who Was Liquidating Treasuries? Going to press on February 12th, the U.S. stock market has

rallied sharply today, following a difficult first full week of February. The Dow Jones Industrial Average

had closed down by more than 1,000 points on Monday, February 5th, the same day Jerome Hayden

Powell was sworn in as Chairman of the Board of Governors of the Federal Reserve System (FRB).

Such was ironic, where the stock-market drop was blamed widely on rising bond yields, which likely

reflected FRB actions. With little parallel movement in the U.S. dollar or gold, the activity likely was

U.S. based, with the Federal Reserve not rolling over some of its balance-sheet assets as indicated in the

minutes of the December 2017 meeting of the FRB’s Federal Open Market Committee (FOMC).

Grant Noble ([email protected]) mentioned in his writing of February 9th that Tom McClellan had

noted ―The $10 billion per month in reduction of Federal Reserve holdings of T-Bonds and mortgage

backed securities (MBS) which was in effect in Q4 of 2017 has now accelerated to a target of $20 billion

a month for Q1 of 2018. But they did the month’s allotted drop all in one week at the end of January,

setting up the illiquidity situation that the stock market is going through now.‖ Per Mr. Noble, ―If the Fed

does this again, the end of February/early March could be bad like the end of January/early February.‖

Tom McClellan (www.mcoscillator.com) was kind enough to provide us with the following graphs:

mailto:[email protected]

http://www.mcoscillator.com/



Graph EXEC-1: Fed Held Treasuries, MBS vs. S&P 500 (Since Jan 2017) - McClellan Financial Publications

Graph EXEC-2: Fed Held Treasuries , MBS vs. S&P 500 (Since 2000), Courtesy McClellan Financial Publications



Reflecting the Fed’s holdings of both U.S. Treasuries and Mortgage Backed Securities (MBS) purchased

by the Fed from banks as part of the Quantitative Easing program, Tom’s graphs speak for themselves.

ShadowStats looked at the same numbers from the standpoint of just the Fed’s holdings of U.S. Treasury

Notes and Bonds, which should have the greatest direct impact on Treasury yields.

From the Minutes of the Federal Open Market Committee, December 12-13, 2017, attended by then

Federal Reserve Chair Janet Yellen and by Board member and then pending Fed Chairman Jerome

Powell:

―The Committee directs the Desk [Federal Reserve Bank of New York Trading Desk] to continue rolling over at auction

the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during December

[2017] that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal

payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during

December that exceeds $4 billion. Effective in January [2017], the Committee directs the Desk to roll over at auction

the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each

calendar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the amount of principal

payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during

each calendar month that exceeds $8 billion. Small deviations from these amounts for operational reasons are

acceptable.‖

As reported by the FRB in its Factors Affecting Reserve Balances of Depository Institutions and

Condition Statement of Federal Reserve Banks dated February 8, 2018, under the Reserve Bank Credit /

Securities Held Outright / U.S. Treasury Securities/ Notes and bonds, nominal, holdings dropped by

$10.984 (-$10.984) billion in the daily-average holdings of week-ended February 7, 2018, versus the prior

week-ended January 31, 2018. That decline was of a magnitude that likely boosted market yields. It was

the largest one week decline in Fed holdings since a drop of $12.163 (-$12.163) billion in the week-ended

August 22, 2012. That 2012 action was just two weeks before the Federal Reserve announced its third

round of Quantitative Easing (QE3) in September 2012. The flow of maturities appears to have affected

the timing of the actual non-rolling over of maturing securities in the current circumstance.

Discussed in Section IV on the Federal Debt and Deficits and Section V on Inflation (to be detailed in the

SPECIAL COMMENTARY, ANNUAL REVIEW - PART TWO), ongoing Fed problems with the banking

system and intensifying fiscal crises and long-term sovereign solvency concerns for the U.S. Treasury

should hit the U.S. financial markets hard, discussed in Section VI on the Markets.

With U.S. Economic Activity Never Recovering from the Recession, an Intensifying, Renewed

Downturn Will Hit the Financial Markets, FOMC Policy and U.S. Fiscal Conditions Hard.

Discussed in Section I on the Economy, the better-quality economic numbers show the broad economy

never recovered from the 2007 Recession, with key elements, ranging from manufacturing, construction

and housing to consumer credit, amongst others, having seen no new expansion for at least the last ten

years. Driving that circumstance are continued issues with Consumer Liquidity, discussed in Section II,

and restrictive Federal Reserve policies aimed at keeping the banking system solvent, frequently at the

expense otherwise of supporting domestic economic activity (Section III).

FOMC Current Tightening Actions Increasingly Should Come Under Pressure from the Faltering

Economy and Continued Stock-Market Selling. Discussed briefly in Section III on the FED, and as

will be detailed in the SPECIAL COMMENTARY, ANNUAL REVIEW - PART THREE, a renewed

downturn in domestic economic activity would intensify liquidity and solvency stresses on the banking

https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20171213.pdf

https://www.federalreserve.gov/releases/h41/

https://www.federalreserve.gov/releases/h41/



system, placing renewed pressure on the FRB to revert to an expanded Quantitative Easing program.

Such would intensify selling pressure against the U.S. dollar, intensify selling pressure on the U.S. stock

market from increasing flight of foreign investment from the dollar, and intensifying U.S. inflationary

pressures by spiking global oil prices.

Looming Crises May Trigger Needed U.S. Government Actions That Currently Are Stuck in

Political Gridlock. Circumstances have evolved minimally for the better, in the year since the

predecessor No. 859 Special Commentary, but the longer-range outlook and issues have changed little.

Much of what follows here is repeated from the missive, albeit with updated circumstances.

In his first State of the Union Address (January 30th), President Donald Trump took credit for a record-

high stock market, a massive tax overhaul, significant regulatory reform and the lowest unemployment in

17 years. The stock-market rally was real, but possibly fleeting. Regulatory reform by Executive Order

and the tax overhaul were real, despite the wonderful headline numbers on unemployment, which are not

as advertised. Events of the first year all were in the context of political adversity in a hostile Congress,

both on the other side of the aisle and from elements within his own party who never signed on to his

nomination, and in the context of a broadly hostile press, which also never signed on to his nomination.

As discussed in No. 859, Mr. Trump was elected by a disgruntled electorate. Had he had a strongly

supportive Congress elected with him, some of the broader issues needing corrective action, such as the

budget deficit and needed economic stimulus (partially detailed in terms of an infrastructure program, as

we go to press) might have been addressed. The needed shift in Congress to give the President the power

to really over haul the system and drain that former malarial swamp on the Potomac, awaits the outcome

the November 6th Congressional Election.

Three-Pronged Approach Still Needed, Now Awaits Crisis Motivation. In No. 859, ShadowStats

proposed a three-pronged approach to revitalizing the U.S. economy, in the context of (1) developing a

credible plan for long-range fiscal stability, sovereign solvency for the U.S. Government. Such would

have created, underlying fundamental near- and long-term strength in and support for the U.S. dollar

within the global financial markets. That would have allowed for (2) a short-term increase in the deficit

to help fund such areas as infrastructure investment.

Separately, (3) the U.S. banking system needs to be overhauled, in the context of the Federal Reserve

System and the still-troubled banking system, some ten years after the Panic of 2008, an effective crash of

the banking system of that time. President Trump has gained control of the Fed, now, with his own

nominees.

Nonetheless, a serious solvency crisis, severe financial crises and renewed banking-system problems

remain in play with a still meaningfully-impaired economy and finally-strapped electorate.

Given the recent budget package and tax reform, nothing seems likely to move the system towards

stability at present, shy of reaction to a major financial-system disruptions and/or financial-market

upheaval. Unless the nation’s long-term solvency issues are addressed soon, such crises are unavoidable

and loom in the not-so-distant future (to be detailed in SPECIAL COMMENTARY, ANNUAL REVIEW -

PART TWO, in particular is the risk is massive debasement of the U.S. dollar.

http://www.shadowstats.com/article/c859.pdf





Physical Gold Remains the Primary Hedge Against Inflation. U.S. dollar debasement most frequently

is reflected in inflation, for those living in a dollar denominated world. Discussed in Section 5 on

INFLATION (see Table INFLATION-1) and Section 6 on MARKETS, despite the extraordinary price

volatility seen for gold in recent years, that precious metal has retained its hedge against inflation,

irrespective of inflation measurement.

In the event of a still-likely, eventual massive debasement of the U.S. dollar—a hyperinflation—physical

holdings of the precious metals gold and silver remain the primary hedges, stores of wealth that can

maintain the purchasing power of the one’s wealth and assets in a form that is both liquid and portable.

For further approaches to handling these unusual circumstances ahead, see 2014 Hyperinflation Report—

Great Economic Tumble, beginning there on page 94.

_______________

Contents – Major Sections and Graphs

EXECUTIVE SUMMARY – ECONOMIC, FINANCIAL AND SYSTEMIC DISTRESS 2

Financial Markets Face Continued Turmoil, the Economy Faces Renewed Downturn 2

Graph EXEC-1: Fed Held Treasuries, MBS vs. S&P 500 (Since Jan 2017) - McClellan Financial Publications .................. 3

Graph EXEC-2: Fed Held Treasuries , MBS vs. S&P 500 (Since 2000), Courtesy McClellan Financial Publications .......... 3

I. Economy: Real-World Activity Never Recovered, Still Faltering Ex-Disaster Boosts 9

Graph ECON-1: ―The Headline Illusion‖ Real GDP (1970 to 2017), First Estimate of Fourth-Quarter 2017 ..................... 11

Graph ECON-2: ―Corrected‖ Real GDP (1970 to 2017), First Estimate of Fourth-Quarter 2017 ....................................... 11

Graph ECON-3: ―The Headline Illusion‖ Real GDP Index (2000 to 2017) First Estimate of Fourth-Quarter 2017 ............ 12

Graph ECON-4: ―Corrected‖ Real GDP Index (2000-to-2017), First Estimate of Fourth-Quarter 2017 ............................. 12

Graph ECON-5: Cass Freight Index™ (January 2000 to December 2017) ........................................................................... 13

Graph ECON-6: U.S. Petroleum Consumption (January 2000 to November 2017) ............................................................... 13

Graph ECON-7: The Conference Board Help Wanted OnLine®

to January 2018 .................................................................. 14

Graph ECON-8: Comparative Unemployment Rates U.3, U.6 and ShadowStats ................................................................... 14

Graph ECON-9: ShadowStats-Alternate Unemployment Measure—Inverted Scale (2000 to 2018) ...................................... 15

Graph ECON-10: Civilian Employment-Population Ratio (2000 to 2018) ............................................................................. 15

Graph ECON-11: Labor Force Participation Rate (2000 to 2018) ........................................................................................ 16

Graph ECON-12: Inflation-Adjusted, Quarterly U.S. Merchandise Trade Deficit through 4q2017 ....................................... 16

Graph ECON-13: Real New Order for Durable Goods Orders – Ex-Commercial Aircraft ................................................... 17

Graph ECON-14: Headline ShadowStats-Corrected Level of Real NODG Ex-Commercial Aircraft (Jan 2000 = 100)........ 17

http://www.shadowstats.com/article/no-617-special-commentary.pdf




Graph ECON-15: Indexed Headline Level of Industrial Production ...................................................................................... 18

Graph ECON-16: Headline ShadowStats-Corrected Level of Industrial Production (Jan 2000 = 100) ................................ 18

Graph ECON-17: Industrial Production - Manufacturing (76.4% of Aggregate Production in 2016)................................... 19

Graph ECON-18: U.S. Industrial Production – Manufacturing, Consumer Goods (2000 to 2017) ....................................... 19

Graph ECON-19: Headline Real Retail Sales Level, Indexed to January 2000 = 100 ........................................................... 20

Graph ECON-20: ―Corrected‖ Real Retail Sales Level, Indexed to January 2000 = 100 ..................................................... 20

Graph ECON-21: Index of Total Real Construction Spending (2000 to 2017) ....................................................................... 21

Graph ECON-22: Year-to-Year Percent Change in Real Construction Spending (2000 to 2017) .......................................... 21

Graph ECON-23: Aggregate Housing Starts (Annualized Monthly Rates of Activity, 2000 to 2017) ..................................... 22

Graph ECON-24: Housing Starts (Annualized Monthly Rate of Activity, 6-Month Moving Avg), 1946 to Date .................... 22

II. Consumer Liquidity Watch: Consumers Unable to Drive Sustainable Real Growth 23

Graph CLW-1: Consumer Confidence (2000 to 2018) ............................................................................................................ 27

Graph CLW-2: Consumer Sentiment (2000 to 2018) .............................................................................................................. 27

Graph CLW-3: Comparative Confidence and Sentiment (6-Month Moving Averages, 1970 to 2018) ................................... 28

Graph CLW-4: Annual Real Median U.S. Household Income (1967 to 2016) ........................................................................ 28

Graph CLW-5: Monthly Real Median Household Income (2000 to May 2017) Index, January 2000 = 100 ......................... 30

Graph CLW-6: Monthly Real Median Household Income (2000 to May 2017) Year-to-Year Change ................................... 30

Graph CLW-7: Real Average Weekly Earnings, Production and Nonsupervisory Employees, 1965-to-Date ........................ 31

Graph CLW-8: Annual Average of Weekly Earnings, Annual Percent Change (2000 to 2017).............................................. 32

Graph CLW-9: Household Sector, Real Credit Market Debt Outstanding (2000 through Third-Quarter 2017) ................... 33

Graph CLW-10: Real Consumer Credit Outstanding, Ex-Federal Student Loans (2000 to 2017) ......................................... 33

Graph CLW-11: Nominal Consumer Credit Outstanding (2000 to 2017) ............................................................................... 35

Graph CLW-12: Real Consumer Credit Outstanding (2000 to 2017) ..................................................................................... 35

Graph CLW-13: Year-to-Year Percent Change, Real Consumer Credit Outstanding (2000 to 2017) .................................... 36

III. Fed: New Chairman Faces Continued Conflicting Banking-System and Economic Woes 37

Graph FED-1: Headline U.3 Unemployment versus the Labor Force Participation Rate (1994 to 2018) ............................. 39

Graph FED-2: Payroll Employment, Not-Seasonally-Adjusted, Annual Percent Change — 2017 Benchmarking ................ 39

Graph FED-3: M3 Money Supply - Year-to-Year Change (2004 to 2018) .............................................................................. 40

Graph FED-4: Monetary Base – Year-to-Year Change (1984 to 2018) .................................................................................. 40

Graph FED-5: Monetary Base – Level (1984-2018) ............................................................................................................... 41

Graph FED-6: Financial- versus Trade-Weighted U.S. Dollar (1985 to 2018) ...................................................................... 41

Graph FED-7: Year-to-Year Change, Financial- versus Trade-Weighted U.S. Dollar (1986 to 2018) .................................. 42

Graph FED-8: Oil Prices versus the ShadowStats Financial-Weighted U.S. Dollar (2000 - 2018) ....................................... 42

IV. Federal Debt and Deficit: Continuing Out of Control 43

Graph FISCAL-1: Fiscal-Year-End Gross Federal Debt versus Nominal GDP (1950 to 2017) ............................................ 44

Graph FISCAL-2: Fiscal-Year-End Total Federal Obligations versus Nominal GDP (2000 to 2017) .................................. 44



V. Inflation: Destroyer of Real Wealth and Purchasing Power 45

Table INFLATION-1: Historical Comparisons of Inflation Measures and Inflation Hedges (1914 to 2017) ......................... 46

Graph INFLATION-1: Consumer Inflation (1665 to 2017) .................................................................................................... 47

Graph INFLATION-2: Consumer Inflation (1665 to 2016) – Logarithmic Plot ..................................................................... 47

Graph INFLATION-3: Consumer Inflation (1665 to 2017) versus Gold ................................................................................ 48

Graph INFLATION-4: Consumer Inflation (1665 to 2017) versus Gold – Logarithmic Plot ................................................. 48

VI. Markets: Pending Dollar and Stock Market Crises, Preserving Wealth 49

Graph MARKETS-1: Nominal Gold Price versus the Swiss Franc (1970 to 2018) ................................................................ 49

Graph MARKETS-2: Nominal Gold Price versus Silver Price (1970 to 2018) ....................................................................... 50

Graph MARKETS-3: Nominal Gold Price versus Oil Price (1970 to 2018) ........................................................................... 50

Graph MARKETS-4: Nominal Gold Price versus Nominal S&P 500 Total Return Index (2000 to 2018) .............................. 51

Graph MARKETS-5: Real Gold Price versus Real S&P 500 Total Return Index (2000 to 2018) .......................................... 52

Graph MARKETS-6: Real Gold and Silver Price Indices (2000 to 2018) ............................................................................... 53

Graph MARKETS-7: Real S&P 500 and Dow Jones Industrial Average Indices (2000 to 2018) ........................................... 54

Graph MARKETS-8: Real U.S. Treasury Yields—3-Month, 5- and 10-Year (2000 to 2018) .................................................. 54

Graph MARKETS-9: Real Home Value Index (2000 to 2018) ................................................................................................ 55

VII. Week, Month and Year Ahead 56

VIII. Links to Prior Commentaries and Special Reports 60

_______________



I. Economy: Real-World Activity Never Recovered, Still Faltering Ex-Disaster Boosts

Net of Temporary Boosts from Natural-Disaster Recovery, Underlying Real-World Activity

Continues in Faltering, Non-Recovered Economic Growth. The U.S. economy remains seriously

impaired, despite reporting from the Bureau of Economic Analysis (BEA), Bureau of Labor Statistics

(BLS) and Census Bureau (Census) that some major headline elements of the economy (excluding

headline manufacturing, housing and construction and measures of employment stress) just have been

booming along since mid-2009. Sycophantic support for that position has followed from many on Wall

Street, from media heavily dependent on related Wall Street advertising revenues and from incumbent

politicians.

The booming-economy story was enhanced in late-2017 from the aftershocks of major natural disasters,

specifically hurricanes and wildfires. Headline economic impact ranged from boosted consumption of

automobiles, replacing those destroyed in hurricanes and fires, to the rebuilding of structures and

infrastructure destroyed in those same tempests and conflagrations. Separately, there were disruptions to

and recovery of Gulf Coast oil and gas production, and there were disruptions in the federal government’s

economic reporting, particularly to the Household Survey, which produces the unemployment series.

All those factors, however, are or were temporary. To the extent that economic consumption and

investment were boosted in the aftermath of the destruction, such was funded either by insurance

payments or by savings liquidation, generally not by growth in income. As to the impacted economic

series, industrial production and the housing/construction data have begun to see an unwinding of the

disaster impact. That still looms for retail sales and GDP. The unemployment data were skewed heavily

by bad definitions, but even there, the headline unwinding should be seen in the next couple of months.

ShadowStats estimates that economic reporting should be near normal, once headline January and

February 2018 data are in place.

As Reported Activity Returns to Pre-Disaster Levels, Economic Expectations Should Take a Heavy Hit

in the Next Several Months. As the disaster distortions work out of the headline detail, economic growth

should take an ―unexpected‖ hit, where the media and markets have embraced and hyped the strength of

the recent, temporarily-bloated growth. Accordingly, first-quarter 2018 GDP growth is at high risk of a

relative quarterly contraction, despite the headline slowing growth in real fourth-quarter versus third-

quarter 2017 GDP.

Real GDP “Recovery” Now 15.2% Above Its Pre-Recession High, While the Never-Recovered U.S.

Manufacturing Still Is 4.5% (-4.5%) Shy of Recovery, after 10-Full Years of Non-Expansion. Headline real (inflation-adjusted), fourth-quarter 2017 U.S. Gross Domestic Product (GDP), the purported

broadest measure of domestic activity—that flagship of domestic economic statistics—stood 15.2% above

its pre-2007-recession peak (see Graphs ECON-1 and 3). No other standard measure of economic activity

comes close to supporting that. As frequently discussed in the GDP Commentaries (see Commentary No.

933).

Underlying Real-World Economic Activity Never Recovered from the Great Recession. Underlying

reality remains that the economy crashed into 2009 and never has recovered fully. Not only that, but

broad activity began to turn down anew, with an unrecognized ―new‖ recession likely to be timed from





December 2014, as indicated by downturn in the Industrial Production and the Manufacturing series (see

Graph ECON-16 out of the Federal Reserve).

As with most series that have shown some recovery, such as the Industrial Production, which just notched

into ―recovery,‖ boosted by strong oil production or Real Retail sales, which has been in formal recovery

for some time (both well shy of the headline GDP recovery), they all reflect deflation by too low an

inflation rate (see Section V on Inflation). The inflation-corrected graphs, however, show no recovery,

even including the GDP. Consider Graphs ECON-2 versus ECON-1 (GDP long-term), ECON-4 versus

ECON-3 (GDP short-term), ECON-14 versus ECON-13 (Durable Goods Orders), ECON-16 versus

ECON-15 (Production) and ECON-20 versus ECON-19 (Retail Sales). Nearly all the other graphs show

non-recovery, non-expansion.

ShadowStats contends that the non-recovery, stagnation or new downturn seen in various series are

nothing more than a continuing down-leg of the economic collapse that began somewhat before 2007,

bottomed out in mid-2009, never recovering its pre-recession high, holding in purgatory of variably

stagnant and now down-trending activity. Again, where total industrial activity has been boosted

minimally above recovery level by oil and gas production, new orders for durable goods and

manufacturing have remained well shy of recovering their pre-recession highs, completing a record 120

straight months of non-expansion.

That non-recovery has been seen as well all with all the Housing and Construction measures ECON-21 to

24, the Real Merchandise Trade Deficit ECON-12, and supporting industries such Freight in Graph

ECON-5, Petroleum Consumption in ECON-6, and with measures of labor/employment stress in Graphs

ECON-7 to 11, with ECON-8 including a comparative ShadowStats Alternate Unemployment Measure.

[Graphs ECON-1 to 24 begin on the next page]



Graph ECON-1: ―The Headline Illusion‖ Real GDP (1970 to 2017), First Estimate of Fourth-Quarter 2017

Graph ECON-2: ―Corrected‖ Real GDP (1970 to 2017), First Estimate of Fourth-Quarter 2017

0

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Bil

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Headline Real GDP

Nominal GDP Deflated by Implicit Price Deflator To 4q2017, Seasonally-Adjusted [ShadowStats, BEA]

Formal Recession

Headline GDP

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

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Corrected Real GDP Nominal GDP Deflated by Implicit Price Deflator Adjusted for

Understatement of Annual Inflation To 4q2017, Seasonally-Adjusted [ShadowStats, BEA]

Formal Recession

ShadowStats Recession

Corrected GDP



Graph ECON-3: ―The Headline Illusion‖ Real GDP Index (2000 to 2017) First Estimate of Fourth-Quarter 2017

Graph ECON-4: ―Corrected‖ Real GDP Index (2000-to-2017), First Estimate of Fourth-Quarter 2017

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Headline Real GDP -- Index Level

GDP Deflated by Official Implicit Price Deflator To 4q2017, Seasonally-Adjusted [ShadowStats, BEA]

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Corrected Real GDP Nominal GDP Deflated by Implicit Price Deflator Corrected for

Roughly Two-Percentage Point Understatement of Annual Inflation Quarterly to 4q2017, Seasonally-Adjusted [ShadowStats, BEA]



Graph ECON-5: Cass Freight Index™ (January 2000 to December 2017)

Graph ECON-6: U.S. Petroleum Consumption (January 2000 to November 2017)

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ex L

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Cass Freight Index™ (Jan 2000 = 100) To December 2017, Not Seasonally Adjusted

[ShadowStats, Cass Information Systems, Inc.]

Official Recession

Monthly Level, Not Seasonally Adjusted

12-Month Trailing Average

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U.S. Product Supplied of Crude Oil and Petroleum Product To November 2017, Not Seasonally Adjusted,

Millions of Barrels per Month, Trailing Twelve-Month Average [ShadowStats, Energy Information Agency]

Official Recession

Monthly Level, Not Seasonally Adjusted

12-Month Moving Average of Same



Graph ECON-7: The Conference Board Help Wanted OnLine® to January 2018

Graph ECON-8: Comparative Unemployment Rates U.3, U.6 and ShadowStats

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ng

e

The Conference Board Help Wanted OnLine® Year-to-Year Percent Change, Seasonally-Adjusted

To January 2018 [ShadowStats, Conference Board, NBER]

Official 2007 Recession

Total HWOL Ads, Year/Year Percent Change

New HWOL Ads, Year/Year Percent Change



Graph ECON-9: ShadowStats-Alternate Unemployment Measure—Inverted Scale (2000 to 2018)

Graph ECON-10: Civilian Employment-Population Ratio (2000 to 2018)

0

1

2

3

4

5

6

7

8

9

1010%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

1994

1995

1996

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2003

2004

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2017

2018S

ha

do

wS

tats

Un

em

plo

ym

en

t R

ate

(S

cale

In

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ed

) ShadowStats-Alternate Unemployment Rate (Inverted Scale)

Long-Term Discouraged/Displaced Workers Included (BLS Excluded Since 1994) To January 2018, Seasonally-Adjusted [ShadowStats, BLS]

0

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58%

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1994

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Civ

ilia

n E

mp

loym

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t-P

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Civilian Employment-Population Ratio To January 2018, Seasonally-Adjusted [ShadowStats, BLS]



Graph ECON-11: Labor Force Participation Rate (2000 to 2018)

Graph ECON-12: Inflation-Adjusted, Quarterly U.S. Merchandise Trade Deficit through 4q2017

0

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62.0%

62.5%

63.0%

63.5%

64.0%

64.5%

65.0%

65.5%

66.0%

66.5%

67.0%

67.5%1994

1995

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2011

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Part

icip

ati

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Rate

Participation Rate [Labor Force as a Percent of Population]

To January 2018, Seasonally-Adjusted [ShadowStats, BLS]

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Bil

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ns

of

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2009 D

oll

ars

Real U.S. Merchandise Trade Deficit (Census Basis) Quarterly Deficit at Annual Rate (1994 to 4q2017 [to Advance December])

Seasonally-Adjusted [ShadowStats, Census]



Graph ECON-13: Real New Order for Durable Goods Orders – Ex-Commercial Aircraft

Graph ECON-14: Headline ShadowStats-Corrected Level of Real NODG Ex-Commercial Aircraft (Jan 2000 = 100)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bil

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t 2009 D

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ars

Real New Orders for Durable Goods (Ex-Commercial Aircraft) Billions of Constant $2009, Deflated by PPI Durable Manufactured Goods

To December 2017, Seasonally-Adjusted [ShadowStats, Census, BLS]

Six-Month Moving Average

One-Month Reported

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Ind

ex L

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ry 2

000 =

100

Corrected Real New Orders for Durable Goods (Ex-Commercial Aircraft) Six-Month Moving Average, Deflation Corrected for Hedonic-Adjustments




Graph ECON-15: Indexed Headline Level of Industrial Production

Graph ECON-16: Headline ShadowStats-Corrected Level of Industrial Production (Jan 2000 = 100)

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Ind

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100

Headline Industrial Production (Re-Indexed to Jan 2000 = 100)

Through December 2017, Seasonally-Adjusted [ShadowStats, FRB]

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Ind

ex L

evel,

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100

ShadowStats-Corrected Industrial Production

Hedonic-Adjusted Inflation Understatement Removed, Index Jan 2000 = 100 Through December 2017, Seasonally-Adjusted [ShadowStats, FRB]



Graph ECON-17: Industrial Production - Manufacturing (76.4% of Aggregate Production in 2016)

Graph ECON-18: U.S. Industrial Production – Manufacturing, Consumer Goods (2000 to 2017)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ind

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100

Production - Manufacturing (SIC) (2012 = 100)

Level to December 2017, Seasonally-Adjusted [ShadowStats, FRB]

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2012 =

100

Production - Consumer Goods (2012 = 100) Level to December 2017, Seasonally-Adjusted [ShadowStats, FRB]



Graph ECON-19: Headline Real Retail Sales Level, Indexed to January 2000 = 100

Graph ECON-20: ―Corrected‖ Real Retail Sales Level, Indexed to January 2000 = 100

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Indexed Real Retail Sales Level (Deflated by CPI-U)


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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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100

Corrected Real Retail Sales Level Deflated by Shadow-Stats-Alternate CPI (1990-Base)

To December 2017, Seasonally-Adjusted [ShadowStats, Census]



Graph ECON-21: Index of Total Real Construction Spending (2000 to 2017)

Graph ECON-22: Year-to-Year Percent Change in Real Construction Spending (2000 to 2017)

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Index of Real Total Value of Construction Put in Place

To December 2017, Inflation Adjusted (Jan 2000 = 100) Seasonally-Adjusted [ShadowStats, Census Bureau]

Reflects all forms of U.S. construction spending, public and private, ranging from residential and office buildings, to highways and water systems. Inflation-adjustment is based on the ShadowStats Composite Construction Deflator (using weighted industry cost surveys and related GDP deflators).

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ind

ex L

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100

Real Total Value of U.S. Construction Put in Place Year-to-Year Percent Change to December 2017

Seasonally-Adjusted [ShadowStats, Census Bureau]



Graph ECON-23: Aggregate Housing Starts (Annualized Monthly Rates of Activity, 2000 to 2017)

Graph ECON-24: Housing Starts (Annualized Monthly Rate of Activity, 6-Month Moving Avg), 1946 to Date

_______________

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An

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s

Aggregate Housing Starts (Monthly and Six-Month Moving Average) To December 2017, Seasonally-Adjusted [ShadowStats, Census and HUD]

Official Recessions

Monthly Housing Starts

Six-Month Moving Avergage

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1945 1955 1965 1975 1985 1995 2005 2015

Mil

lio

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of

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its

Housing Starts (Annual Rate by Month, Six-Month Moving Avg) 1946 to Dec 2017, Seasonally-Adjusted [ShadowStats, Census and HUD]

Official Recession

Nonfarm Housing Starts (1946-1969)

Housing Starts (1959 to Date)



II. Consumer Liquidity Watch: Consumers Unable to Drive Sustainable Real Growth

Continuing Consumer Liquidity Stresses Constrain Broad Economic Activity. [Published in the

regular ShadowStats Commentaries, this Consumer Liquidity Watch is updated for December 2017

Consumer Credit Outstanding and a related new Graph CLW-10.] The U.S. consumer faces ongoing

financial stress, which recently had been mirrored in renewed softening of fundamental headline

economic activity, including Payroll-Employment, Real Retail Sales, Housing and Construction, and the

Manufacturing/ Production sector, all pre-hurricane activity. Net of what have been mixed, but

significant, near-term hurricane distortions, initial hits to activity were followed by related and transient

economic boosts from recovery, replacement and restoration activity. Funded by insurance payments and

savings liquidation, those distortions broadly should have passed from headline data by the February/

March reporting of January/February 2018-headline detail. Such effects have been, and will continue to

be, discussed in the separate analyses of relevant series in covered in the regular ShadowStats

Commentaries. Separately, as discussed ahead, there have been recent signals of faltering consumer

liquidity as well as optimism, despite recent, albeit heavily distorted, positive economic reporting.

Monthly series that have faced the most severe, disaster-triggered reporting disruptions, where headline

details have yet to stabilize or correct, include in particular Household Survey Employment and

Unemployment (see the Opening Comments of Commentary No. 930-B) and Retail Sales (Commentary

No. 931). December Industrial Production appeared to have stabilized in terms of surging activity, but it

still needs to subside to levels stable with normal consumption activity and inventories (see Commentary

No. 932). Despite the initial slowing in headline Fourth-Quarter 2017 GDP growth, the series remains

heavily bloated from the disaster-distortions (see Commentary No. 933).

Liquidity Issues Limit Economic Activity. Severe and persistent constraints on consumer liquidity of the

last decade or so drove economic activity into collapse through 2009, and those conditions have prevented

meaningful or sustainable economic rebound, recovery or ongoing growth since. The limited level of, and

growth in, sustainable real income, and the inability and/or unwillingness of the consumer to take on new

debt have remained at the root of the liquidity crisis and ongoing economic woes.

These underlying pocketbook issues contributed to the anti-incumbent electoral pressures in the 2016

presidential race. The post-election environment showed a near-term surge in both the consumer

confidence and sentiment measures to levels generally not seen since before the formal onset of the

recession in 2001, let alone 2007. Yet, underlying liquidity conditions, economic reality and lack of

positive actions out of the government to turn the economy meaningfully, so far, all have continued to

remain shy of consumer hopes, and those numbers have begun to stumble in recent detail.

A temporary liquidity boost fueled by recent disaster effects, such as insurance payments or savings

drawdowns to fund replacement of storm-damaged assets, are of a one-time nature and short-lived in

terms of ongoing economic impact. The underlying, fundamental longer-term liquidity issues remain in

place. Nonetheless, mirroring the disaster-fueled economic hype in the popular press, consumer optimism

had rallied strongly, albeit, again, now faltering, as discussed shortly.

http://www.shadowstats.com/article/c930b.pdf








Including the various consumer-income stresses discussed in Special Commentary No. 888, broad,

underlying consumer-liquidity fundamentals simply have not supported, and still do not support a

fundamental turnaround in general economic activity—a post ―Great Recession‖ expansion—and broadly

are consistent with a ―renewed‖ downturn in that non-recovered economic activity. Indeed, never truly

recovering post-Panic of 2008, limited growth in household income and credit have eviscerated and

continue to impair broad, domestic U.S. business activity, which is driven by the relative financial health

and liquidity of consumers. These underlying liquidity conditions and reality—particularly income and

credit—remain well shy of average consumer hopes and needs, irrespective of the new tax laws.

The combined issues here have driven the housing-market collapse and ongoing, long-term stagnation in

consumer-related real estate sales and construction activity, and have constrained both nominal and real

retail sales. Related, personal-consumption-expenditure and residential-construction categories accounted

for 73.1% of the headline real, fourth-quarter 2017 U.S. GDP.

Net of short-lived disaster distortions (insurance payments, savings liquidations), with the better-quality

economic indicators and underlying economic reality never having recovered fully from the collapse into

2009, consumers increasingly should pull back on consumption in the months ahead. Underlying reality

is evident in more-meaningful economic indicators—not the GDP—irrespective of the transient boosts

from disasters or political gimmicks, discussed recently in General Commentary No. 929 and the

Executive Summary of Commentary No. 928.

Anecdotal Evidence of Business and Consumer Uncertainty Continue to Indicate a Seriously-Troubled

Economy and Very Dangerous Financial Markets. Against what appears to be a headline economic

consensus that all is right again, with the U.S. economy and financial markets, underlying real-world

common experience suggests a much different outlook. Regularly discussed here, ongoing non-recovery,

low-level stagnation and signs of renewed downturn remain patterns common to key elements of headline

U.S. economic activity. Consider factors ranging from housing sales and broad construction activity, to

headline reporting of domestic manufacturing, as well as those series that are heavily gimmicked, such as

the Gross Domestic Product (GDP), also regularly discussed and dissected here.

Similar signals of such economic stress are seen in patterns of activity that move along with the real-

world broad economy. They range from indicators such as freight volume and domestic consumption of

petroleum to factors such as levels of real consumer debt outstanding, real average weekly earnings and

measures of employment stress in the broad economy. Those stresses are reflected in historically-low

levels of the employment-population ratio and the labor-force participation rate. With the liquidity-

starved U.S. consumer driving three-quarters of the GDP, there is no way for the broad economy to

boom—happy Retail Sales headlines aside—without some meaningful shift in underlying consumer

circumstances. Links to background discussions in these various areas are found in the Recent

Commentaries section of the Week, Month and Year Ahead, along with links to background discussions

on the quality of the more-politicized GDP (Commentary No. 928) and employment/unemployment

details discussed in the Supplemental Labor-Detail Background of Commentary No. 930-B.

Beyond assessing headline economic numbers, ShadowStats also looks at anecdotal evidence, including

comments by subscribers and clients, who live in the real world. Two broad observations have come

from a number of recent conversations. First, real estate activity appears to be slowing in recently strong

areas. Second, a number of major companies are ―sitting on their hands,‖ holding back on issuing new

contracts to third-party vendors in areas such as upgrading computer systems and other consulting. The








companies cite the slowdown in contracts as ―due to uncertainty,‖ an issue, as well with the U.S.

consumer, where that uncertainty encompasses:

Unfolding circumstances in the Washington, D.C. political arena.

Where the manic financial markets are headed.

Ultimately, what is, or will be, happening to near-term business activity?

Economic reporting, and business and financial-market stories sometimes receive happy year-end spikes

in the press. That circumstance was supplemented in late-2017 by near-term hurricane boosts to, and

distortions of, some current economic activity, such as the November Retail Sales reporting. The latter

circumstance should prove fleeting. The underlying, broadly-faltering U.S. economy should be

dominating headline economic reporting, once again, and all too soon, most likely early in 2018. That

said, albeit reflecting some of the headline economic hype in the popular press, headline consumer

optimism remains strong, albeit faltering most recently.

Consumer Optimism: Consumer Sentiment and Confidence Continue to Falter. On top of the full-

month December 2017 readings pulling back sharply for both The Conference Board’s Consumer-

Confidence Index®

(Confidence), and the University of Michigan’s Consumer Sentiment Index

(Sentiment), full-January 2018 Confidence and Sentiment (February 2nd) readings were minimally-

positive and down. While January Confidence (January 30th) rose slightly, it did little to offset the

December decline and was in the context of indications of mounting foreclosure activity in the

homeowner real estate market (see Existing Home Sales in the Reporting Detail of Commentary No. 933).

Reflected in Graphs CLW-1 and CLW-2, Confidence and Sentiment monthly readings had jumped

sharply, respectively to multi-year highs in November and October. Yet, the December Confidence

reading plunged, more than offsetting the November gain and most of the October gain, in context of a

downside revision to the November reading. Similarly, November and December Sentiment readings,

and now January also pulled back sharply or only minimally recovered, largely offsetting the October

surge there. Nonetheless, the latest headline readings remained above their pre-2007 recession peaks.

The deepening monthly downturns in both the headline Sentiment and Confidence numbers are not

consistent with headline, resurgent economic/employment activity, or with the popular media’s heavily-

touted, just-passed strong Holiday-Shopping Season.

For both the Conference Board’s seasonally-adjusted [unadjusted data are not available] Consumer-

Confidence Index® (Graph CLW-1), and the University of Michigan’s not-seasonally-adjusted Consumer-

Sentiment Index (Graph CLW-2), the three-month moving averages also were above pre-2007 recession

highs, yet the still-high moving averages—either flattened out or notched lower in January—having

begun to falter in September 2017, before the storm-distorted, unusual headline surges in October and

November activity.

Smoothed for six-month moving averages (see Graph CLW-3), both series continued above their pre-

2007 recession peaks, with the Confidence measure at its highest level since March 2001, as it had been

plummeting into the onset 2001 recession. That said, on a monthly basis, the current January 2017

readings for both the Confidence and Sentiment measures were down respectively from their pre-2001

recession peaks of May and January 2000, by 15.7% (-15.7%) and 14.6% (-14.6%).




Pre-election, September 2016 Confidence and Sentiment jumped and then plunged in October 2016,

likely reflecting concerns as to the direction of the presidential race. Post-election, both measures rallied

sharply, reflecting surges in consumer optimism into early-2017. Both series then topped and pulled

back, with mixed numbers into August and September 2017, but with the October 2017 Sentiment

measure showing a large jump, purportedly because consumers were willing to accept diminished

prospects for their living standards (see Commentary No. 916)? Nonetheless, the Sentiment measure

retrenched in November and December. The Conference Board blamed hurricane impact in Texas and

Florida for its downturn in September 2017 Confidence, but those numbers exploded into October and

November 2017, again reversing largely with December’s headline downturn.

Showing the Consumer Confidence and Consumer Sentiment measures on something of a comparable

basis, Graphs CLW-1 to CLW-3 reflect both measures re-indexed to January 2000 = 100 for the monthly

reading. Standardly reported, the Conference Board’s Consumer Confidence Index® is set with 1985 =

100, while the University of Michigan’s Consumer Sentiment Index is set with January 1966 = 100.

The Confidence and Sentiment series tend to mimic the tone of headline economic reporting in the press

(see discussion in Commentary No. 764), and often are highly volatile month-to-month, as a result.

Recent press has been highly positive on the headline economic and employment news, reflecting short-

lived hurricane boosts to activity particularly on unemployment (not payroll employment), retail sales and

industrial production. Headline financial and economic reporting in the next month or two should turn

increasingly-negative and unstable. The current downturn in consumer outlook, despite euphoric

headlines is unusual and likely reflects some deep-seated consumer liquidity concerns.

With near-term headline financial and economic reporting likely to turn increasingly negative in the next

couple of months, successive negative hits to both the confidence and sentiment readings are likely to

continue in the near future.

Broadly, though, the harder, financial consumer measures remain well below, or are inconsistent with,

periods of historically-strong economic growth as suggested by headline GDP growth in 2014, for

second-and third-quarter 2015 and for third-quarter 2016 and into third-quarter 2017. Beyond having

happy feelings about the future, consumers still need actual income, cash-in-hand or credit in order to

increase their spending.

Smoothed for irregular, short-term volatility, the two series still generally had held at levels seen typically

in recessions, until the post-2016 election circumstance. Suggested in Graph CLW-3—plotted for the last

48 years—the latest readings of Confidence and Sentiment recently have recovered levels seen in periods

of normal, positive economic activity of the last four decades, with their six-month moving averages at

levels last seen going into the 2001 recession, although increasingly, they appear to be topping out.

[Graphs CLW-1 to CLW-3 begin on the next page.]


http://www.shadowstats.com/article/no-764-september-trade-deficit-construction-spending.pdf



Graph CLW-1: Consumer Confidence (2000 to 2018)

Graph CLW-2: Consumer Sentiment (2000 to 2018)

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Consumer Confidence Survey® -- Conference Board Monthly and Three-Month Moving-Average Index (Jan 2000 = 100)

To January 2018, Seasonally-Adjusted [ShadowStats, Conference Board]

Formal Recession

3-Month Moving Average

Monthly Reading

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Consumer Sentiment Index -- University of Michigan Monthly and 3-Month Moving-Average Index (Jan 2000 = 100)

To January 2018, Not-Seasonally-Adj [ShadowStats, Univ of Michigan]

Formal Recession

3-Month Moving Average

Monthly Reading



Graph CLW-3: Comparative Confidence and Sentiment (6-Month Moving Averages, 1970 to 2018)

2016 Annual Real Median Household Income Still Was Below Its 2007 Pre-Recession High, Below

Activity in the Late-1990s, About Even with the Mid-1970s. The measure of real monthly median

household income, which was provided by www.SentierResearch.com, generally can be considered as a

monthly version of the annual detail shown in Graph CLW-4, based on the most-recent annual detail

released by the Census Bureau and as discussed the Opening Comments of Commentary No. 909.

Graph CLW-4: Annual Real Median U.S. Household Income (1967 to 2016)

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Consumer Confidence and Consumer Sentiment Indices Six-Month Moving Averages, 1970 to January 2018

[ShadowStats, Conference Board, University of Michigan, NBER]

Formal Recession

Sentiment

Confidence

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Annual Real Median Household Income Index (2000-2016) Adjusted for (2013-2014) Discontinuities, Deflated by Headline CPI-U

[ShadowStats, Census Bureau, Bureau of Labor Statistics]

http://www.sentierresearch.com/




Last Monthly Estimate Showed Stagnating Monthly Real Growth. Last reported by Sentier Research, in

what appears to have been the final estimate for the series, May 2017 Real Median Household Income

was statistically unchanged, despite a boost from falling gasoline prices. Discussed in General

Commentary No. 894, and in the contexts of then-faltering gains in post-election consumer optimism, and

inflation-adjusted activity boosted by declining headline Consumer Price Index (CPI-U) inflation

(weakened by seasonally-adjusted gasoline price declines), May 2017 Real Median Monthly Household

Income was ―statistically unchanged‖ (a statistically-insignificant monthly gain of 0.10%). That followed

a statistically-significant monthly gain of 1.00% in April 2017. Shown in Graph CLW-4, such enabled

May 2017 real monthly median household income to hold a level regained in April and otherwise last

seen in February 2002. Year-to-year real median household income rose to 2.44% in May 2017, the

highest level since June 2016, following an annual gain of 1.57% in April 2017 (see Graph CLW-5).

Where real monthly median income plunged into the headline trough of the economic collapse in 2009, it

did not then rebound in tandem with the headline GDP activity. When the GDP purportedly started its

solid economic recovery in mid-2009, the monthly household income numbers nonetheless plunged to

new lows, hitting bottom in 2011. The income series then held in low-level stagnation, until collapsing

gasoline prices and the resulting negative CPI-U inflation drove a post-2014 uptrend in the inflation-

adjusted monthly income index. The index approached pre-recession levels in the December 2015

reporting, but it remained minimally below the pre-recession highs for both the formal 2007 and 2001

recessions until recent months. Real median household income had the potential to resume turning down

anew, as the headline pace of monthly consumer inflation picked up anew, with the August 2017 CPI.

Nonetheless, the most-recent recent ―rebound‖ reported in the series still left consumers financially

strapped. Where lower gasoline prices had provided some minimal liquidity relief to the consumer,

indications are that any effective extra cash largely was used to help pay down unsustainable debt or other

obligations, not to fuel new consumption. Except for mixed gyrations in first-half 2017, the effects of

changing gasoline prices in the headline CPI-U generally had reversed, pushing headline consumer

inflation higher and beginning to push real income lower.

Differences in the Monthly versus Annual Median Household Income. The general pattern of relative

monthly historical weakness has been seen in the headline reporting of the annual Census Bureau

numbers, again, shown in Graph CLW-4, with 2014 real annual median household income having hit a

ten-year low, and, again, with the historically-consistent 2015 and 2016 annual number still holding

below the 2007 pre-recession high.

The Sentier numbers had suggested a small increase in 2014 versus 2013 levels, low-inflation induced

real increases in 2015 and 2016. Allowing for the direction difference in 2014, and continual

redefinitions and gimmicks in the annual series (again, see the Opening Comments of Commentary No.

909) the monthly and annual series had remained broadly consistent, although based on separate questions

within the Consumer Population Series (CPS), as conducted by the Census Bureau.

Where Sentier used monthly questions surveying current annual household income, the headline annual

Census Bureau detail is generated by a once-per-year question in the March CPS survey, as to the prior

year’s annual household income. The Median Household Income surveying results are broadly consistent

with Real Average Weekly Earnings.







Graph CLW-5: Monthly Real Median Household Income (2000 to May 2017) Index, January 2000 = 100

Graph CLW-6: Monthly Real Median Household Income (2000 to May 2017) Year-to-Year Change

Real Average Weekly Earnings—December 2017—Contracted for the Second Consecutive Quarter.

For the production and nonsupervisory employees category—the only series for which there is a

meaningful history (see the discussion in Reporting Detail and Opening Comments of Commentary No.

931), the regularly-volatile, real average weekly earnings gained month-to-month in December 2017, but

fourth-quarter 2017 earnings contracted quarter-to-quarter, for the second consecutive quarter, down at an

annualized pace of 0.94% (-0.94%), having declined by 0.07% (-0.07%) in third-quarter 2017. In the

0

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Co

ns

tan

t D

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ars

, In

de

xed

to

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2000 =

100

Monthly Real Median Household Income Index

Deflated by Headline CPI-U, January 2000 to May 2017 (Final) Seasonally-Adjusted [ShadowStats, www.SentierResearch.com]

0

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8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year-

to-Y

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Perc

en

t C

ha

ng

e

Monthly Real Median Household Income Yr/Yr Change Deflated by Headline CPI-U, January 2001 to May 2017

Seasonally-Adjusted [ShadowStats, www.SentierResearch.com]





broader all-employees category, fourth-quarter real average weekly earnings also contracted, down at an

annualized pace of 1.16% (-1.16%), having gained 0.63% in third-quarter 2017 activity.

Graph CLW-7: Real Average Weekly Earnings, Production and Nonsupervisory Employees, 1965-to-Date

Graph CLW-7 plots the seasonally-adjusted earnings as officially deflated by the BLS (red-line), and as

adjusted for the ShadowStats-Alternate CPI Measure, 1990-Base (blue-line). When inflation-depressing

methodologies of the 1990s began to kick-in, the artificially-weakened CPI-W (also used in calculating

Social Security cost-of-living adjustments) helped to prop up the reported real earnings. Official real

earnings today still have not recovered their inflation-adjusted levels of the early-1970s, and, at best, have

been in a minimal uptrend for the last two decades (albeit spiked recently by negative headline inflation).

Deflated by the ShadowStats (1990-Based) measure, real earnings have been in fairly-regular decline for

the last four decades, which is much closer to common experience than the pattern suggested by the CPI-

W. See the Public Commentary on Inflation Measurement for further detail.

Shown in Graph CLW-8, and as discussed in Commentary No. 931, both the ―all-employees‖ and

―production and nonsupervisory employees‖ categories showed a sharply slowing pace in annual growth

in 2017. Presumably coming off more-positive economic circumstances, the patterns there are consistent

with a renewed economic downturn, not with a new economic boom, and the current pace of decline is

greater than the average tax reduction to be seen by consumers in the year ahead.

Not all economic downturns are reflected in the headline economic data. For example, industrial

production indicated the U.S. economic downturn intensified in fourth-quarter 2014, enough to qualify as

a new recession, which is consistent with the plot in Graph CLW-8. See the related discussions in the

latest GDP missive Commentary No. 928 and Industrial Production in today’s Reporting Detail.

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1965 1975 1985 1995 2005 2015

Co

ns

tan

t 1982-1

984 D

oll

ars

Real Average Weekly Earnings - Production and Nonsupervisory Employees

Deflated by CPI-W versus ShadowStats-Alternate (1990-Base) 1965 to December 2017, Seasonally-Adjusted [ShadowStats, BLS]

Official Recession

CPI-W

ShadowStats-Alternate CPI-W

http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement.pdf





Graph CLW-8: Annual Average of Weekly Earnings, Annual Percent Change (2000 to 2017)

When income growth is inadequate to support consumption growth, consumers often make up the

difference in debt expansion. Yet, real Consumer Credit Outstanding has shown a patterns of declining

annual real growth for the last several quarters, irrespective of the specific series, as reflected in the plots

of real monthly year-to-year change in Graph CLW-12.

Consumer Credit: Lack of Expansion in Real Consumer Credit Constrains Economic Growth. The

final five graphs on consumer conditions address consumer borrowing. Where debt expansion can help

make up for a shortfall in income growth, expansion of consumer debt, which would help fuel expansion

in personal consumption, has been nonexistent.

Quarterly Series. Consider Graph CLW-9 of Household Sector, Real Credit Market Debt Outstanding.

The level of real household debt declined in the period following the Panic of 2008, reflecting loan

defaults and reduced banking lending, and it has not recovered fully, based on the Federal Reserve’s flow-

of-funds accounting through third-quarter 2017, released on December 7th. Household Sector, Real

Credit Market Debt Outstanding in third-quarter 2017 still was down by 10.9% (-10.9%) from its pre-

recession peak of third-quarter 2007. That was against a second-quarter 2017 decline of 11.2% (-11.2%).

The flattened visual uptick at the latest point in Graph CLW-9 reflected a slowing in real year-to-year

change from 1.70% in second-quarter 2017, to 1.55% in third-quarter 2017. Such reflects 40 straight

quarters—a full decade—of credit non-expansion, versus its pre-recession peak.

The series includes mortgages, automobile and student loans, credit cards, secured and unsecured loans,

etc., all deflated by the headline quarterly CPI-U. The level of real debt outstanding has remained

stagnant for several years, reflecting, among other issues, lack of normal lending by the banking system

into the regular flow of commerce. The slight upturn seen in the series through 2015 and into 2016 was

0

1

2

3

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6

7

8

9

10

-1.5%

-1.0%

-0.5%

0.0%

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2.5%

3.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ye

ar-

to-Y

ea

r P

erc

en

t C

ha

ng

e

Annual Average Real Weekly Earnings, Percent Change To December 2017, Seasonally-Adjusted [ShadowStats, BLS]

Official Recession

Production and Supervisory Employees

All Private Employees



due primarily to gasoline-price-driven, negative CPI inflation, which continued to impact the system

through second-quarter 2016 and intermittently into third-quarter 2017. Current activity also has reflected

continuing relative strength from student loans, as shown in the Graphs CLW-10 to CLW-13.

Graph CLW-9: Household Sector, Real Credit Market Debt Outstanding (2000 through Third-Quarter 2017)

Graph CLW-10: Real Consumer Credit Outstanding, Ex-Federal Student Loans (2000 to 2017)

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Ind

ex L

evel,

Jan

ua

ry 2

000 =

100

Household Sector, Real Credit Market Debt Outstanding Deflated by CPI-U. Indexed to First-Quarter 2000 = 100

To 3q2017, Seasonally-Adjusted [ShadowStats, FRB Flow-of-Funds, BLS]

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mer

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dit

,

Ex-F

ed

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l S

tud

en

t L

oan

s,

Jan

2000 =

100

ShadowStats Index of Real Consumer Credit Outstanding Ex-Federally Held Student Loans (Deflated by CPI-U)

Unadjusted by Month and Smoothed with a 12-Month Trailing Average To December 2017, Not Seasonally Adjusted [ShadowStats, FRB, BLS]

Recessions

Ex-Federally Held Student Loans

12-Month Trailing Average



Shown for comparative purposes in Graph CLW-10, real, not-seasonally-adjusted Consumer Credit

Outstanding, Ex-Federally Held Student Loans, has not recovered on a monthly, let alone the 12-month

trailing-average basis used as a surrogate for seasonal adjustment. Discussed in the next section, this

measure of consumer credit now has been through 120 months of non-expansion. That is reflected on a

parallel basis through the latest third-quarter reporting shown in CLW-9. Please note that the scale in

Graph 10 is indexed to Consumer Credit Outstanding Ex-Federal Student Loans equal to 100 in January

2000. In Graphs 11 to 13, that indexing is applied to the total Consumer Credit Outstanding number,

which is greater in amount than its dominant Ex-Federal Student Loans subcomponent.

Monthly Series. Indeed, the ShadowStats analysis usually focuses on the particular current and

continuing weakness in monthly levels of consumer credit, net of what has been rapidly expanding

government-sponsored student loans. Where detail on that series only is available not-seasonally-

adjusted, the following three related graphs and the preceding Graph CLW-10 are so plotted.

Shown through the December 2017 reading (released February 7th), the headline nominal monthly

Consumer Credit Outstanding (CLW-11) is a subcomponent of the nominal Household Sector debt.

Where Graph CLW-12 reflects the real or inflation-adjusted activity for monthly Consumer Credit

Outstanding terms of both level (Graph CLW-12) and year-to-year change (Graph CLW-13). Graphs

CLW-12 and CLW-10 are comparable to the inflation-adjusted Household Sector plot in Graph CLW-9.

Post-2008 Panic, growth in outstanding consumer credit has continued to be dominated by growth in

federally-held student loans, not in bank loans to consumers that otherwise would fuel broad consumption

or housing growth. Although in slow uptrend, the nominal level of Consumer Credit Outstanding (ex-

student loans) has not recovered since the onset of the recession. These disaggregated data are available

and plotted only on a not-seasonally-adjusted basis, with the pattern of monthly levels during one year

reflecting some regular, unadjusted seasonal dips or jumps.

Adjusted for inflation, the lack of recovery in the ex-student loan area is more obvious. Although the

recent monthly upside move in the not-seasonally-adjusted consumer credit reflected a seasonal pattern,

the pace of year-to-year growth has continued to slow sharply, suggesting some tightening of credit

conditions. Adjusted for discontinuities and inflation, ex-student loans, consumer credit outstanding in

December 2017 was down from recovering its December 2007 pre-recession peak by 13.3% (-13.3%).

That is 120 months or a full ten years of non-expansion of credit. Year-to-year real growth shown in

Graph CLW-13 tends to resolve most of the monthly distortions in the not-seasonally-adjusted data.

[Graphs CLW-11 to CLW-13 begin on the next page.]



Graph CLW-11: Nominal Consumer Credit Outstanding (2000 to 2017)

Graph CLW-12: Real Consumer Credit Outstanding (2000 to 2017)

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it O

uts

tan

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g,

Jan

2000 =

100

ShadowStats Index of Nominal Consumer Credit Outstanding Total and Ex-Federally Held Student Loans

To December 2017, Adjusted for Data Discontinuities, NSA [ShadowStats, FRB]

Ex-Student Loans

Total

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nd

ing

, Jan

2000 =

100

ShadowStats Index of Real Consumer Credit Outstanding Total and Ex-Federally Held Student Loans (Deflated by CPI-U)

To December 2017, Adjusted for Discontinuities, NSA [ShadowStats, FRB, BLS]

Ex-Student Loans

Total



Graph CLW-13: Year-to-Year Percent Change, Real Consumer Credit Outstanding (2000 to 2017)

_______________

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Real

Co

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tsta

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ing

, Y

ear/

Year

% C

han

ge

Real Consumer Credit Outstanding, Yr-to-Yr Percent Change

Total and Ex-Federally Held Student Loans (Deflated by CPI-U) To December 2017, Adjusted for Discontinuities, NSA [ShadowStats, FRB, BLS]

Ex-Student Loans

Total



III. Fed: New Chairman Faces Continued Conflicting Banking-System and Economic Woes

As the Fed Moves to Tighten, the Economy Softens from Its Natural Disaster Boosts; Renewed

Downturn Threatens Banking System Liquidity. This Section III on the Federal Reserve will be the

concentration of SPECIAL COMMENTARY, ANNUAL REVIEW - PART THREE. Even with the new

Federal Reserve Chairman, the Panic of 2008 likely still dominates U.S. central-bank concerns. With the

U.S. banking-system then on the brink of collapse, the Federal Reserve and the U.S. Treasury did

everything in their power to prevent a collapse, irrespective of short- or long-term costs (including

inflation). Systemic collapse simply was not an option.

Whatever money had to be created, spent or loaned, whatever liabilities had to be guaranteed, whatever

bad assets had to be absorbed, whatever entities (inefficient, crooked or otherwise) had to be bailed out,

whatever markets had to be manipulated, whatever had to be done as a stop-gap measure was done. What

was not done was to address any of the underlying fundamental issues that led to the crisis, including the

long-term sovereign-solvency issues of the United States (see the Section IV on Federal Debt and

Deficit), or needed meaningful economic stimulus, such as addressing faltering consumer income and

finances (see the Section III on the Economy). Discussed in the executive Summary, those issues still

need to be addressed, along with a long-overdue overhaul of the Federal Reserve System.

Subsequent to quelling the Panic of 2008, the Fed concentrated its efforts on propping the domestic and

global banking systems—if the global banking system failed, such also would encompass the U.S.

system—yet, nearly a decade after the onset of the crisis, the Fed still has not succeeded in fully

reestablishing banking-system health and normal, commercial functionality. The Fed certainly did little

to stimulate domestic commerce—such as fueling lending activity—other than to prevent a banking-

system collapse. Nonetheless, the banking industry remains at risk of further, intensified solvency or

liquidity issues from an intensifying, renewed domestic economic downturn, one that continues in a

system that never really recovered from its collapse into 2009.

Having taken little but stop-gap measures in 2008, which pushed much of the banking-solvency crisis into

the future, the Federal Reserve (and the U.S. Treasury) face continuing systemic insolvency or instability

issues as that future closes in. Therein lies the Federal Reserve’s internal terror, although its raising rates

and tightening, it cannot find a way out of its ongoing crisis, with similar issues affecting other central

banks. Again, a solution may lie with the Congress and the Administration looking to overhaul the Fed

and the domestic banking system.

Inflation Instead of Deflation. Some analysts still look for the current global situation to evolve into a

deflationary collapse of debt. While meaningful insolvencies in the global financial system likely still

loom, the process becomes hyper-deflationary only in the circumstance where the banking system

collapses and money supply disappears, as happened in the United States in the 1930s.

With the precedent of the Panic of 2008 in hand, much more likely are continuing bailouts, wherever

needed, very possibly in the extreme, ultimately with hyperinflationary consequences. When those

controlling the system made the decision to prevent systemic collapse at any and all costs, in 2008, they



made clear their desire in answering the question raised by Robert Frost in his poem Fire and Ice; their

choice appears solidly to be for the world to end in the fire of inflation (2014 Hyperinflation Report—The

End Game Begins page 26, see also the INFLATION section).

Fed Speak Downgrades Definitions of ―Healthy‖ Labor Conditions and Misdirects the Public as to

Central-Bank Motivations. Listening regularly to pronouncements out of the Federal Reserve’s Open

Market Committee (FOMC), or from various members of the Federal Reserve’s Board in recent years,

one easily might conclude that current Fed policy primarily and simply was to maintain the economy and

inflation at ―healthy‖ levels. That is nonsense. While there is little doubt the Fed would like to see those

circumstances, there has been little the U.S. central bank could do to stimulate the economy. At least that

was the frequent protestation from former Fed Chairman Ben Bernanke, although a little increased

lending to the public lending might have been encouraged. As to inflation, the Fed can increase inflation

easily, any time it wishes, as Mr. Bernanke and Ms. Yellen knew all too well, as most assuredly does Fed

Chairman Powell.

The Mission Is to Maintain Banking-System Stability. Simply put, the Federal Reserve’s actions of the

last decade have centered on propping the banking system, not the economy. As public sentiment shifted

against bailing out large banks, the Fed used the weak and non-recovered economy as political cover for

the introduction and later expansion of its Quantitative Easing (QE) programs.

With the underlying, non-recovered U.S. economy faltering anew, the Fed started has to raise rates not for

the purported ―overheating economy‖ concerns, but likely in an effort to boost rates to more economically

viable levels, to resolve questions raised as to ―Fed credibility.‖

Ignoring the Public’s Economic Distress in Stagnant, Non-Recovering Economic Activity, the Fed

Moved Recently to Redefine Much-Weaker Levels of “Normal” Employment Activity. The Federal

Reserve Board’s Federal Open Market Committee (FOMC) has helped to justify its rate hikes, by

claiming that the current headline 4.1% unemployment rate represents a full-employment economy, and

that 150,000 monthly payroll employment growth is healthy. As expanded upon in the regular

employment unemployment missives (see Commentary No. 934-B ), 4.1% is not full employment with the

participation rate and employment-to-population ratios near record lows, while the current annual growth

in payrolls is common to entering a new recession (see Graphs FED-1 and FED-2).

The other Graphs FED-3 to FED-8 reflect current Monetary Policy and U.S. Dollar conditions.

[Graphs FED-1 to FED-8 begin on the next page.]

http://www.shadowstats.com/article/no-614-special-commentary-revised-no-587-of-january-7-2014.pdf





Graph FED-1: Headline U.3 Unemployment versus the Labor Force Participation Rate (1994 to 2018)

Graph FED-2: Payroll Employment, Not-Seasonally-Adjusted, Annual Percent Change — 2017 Benchmarking

62%

63%

64%

65%

66%

67%

68%

69%

70%

71%

72%

73%

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11%1994

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2015

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2017

2018

Part

icip

ati

on

Rate

Head

lin

e U

.3 U

ne

mp

loym

en

t R

ate

Headline U.3 Unemployment Rate versus the

Participation Rate (Labor Force as a Percent of Population) To January 2018, Seasonally-Adjusted [ShadowStats, BLS]

U.3 Unemployment

Particpation Rate

1.2%

1.3%

1.4%

1.5%

1.6%

1.7%

1.8%

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

Ja

n 1

3F

eb

Mar

Ap

rM

ay

Ju

nJ

ul

Au

gS

ep

Oc

tN

ov

Dec

Ja

n 1

4F

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ay

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gS

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Oc

tN

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Dec

Ja

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tN

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tN

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Dec

Ja

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8

Year-

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ear

Perc

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t C

ha

ng

e

Payroll Employment Year-to-Year Change - 2017 Benchmark Yr-to-Yr % Change, NSA, January 2013 to January 2018 [ShadowStats, BLS]

Prior Reporting

Benchmark Revised



Graph FED-3: M3 Money Supply - Year-to-Year Change (2004 to 2018)

Graph FED-4: Monetary Base – Year-to-Year Change (1984 to 2018)

-20%

0%

20%

40%

60%

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100%

120%

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2018

Year-

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% C

ha

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e

St. Louis Fed Adjusted Monetary Base, Yr/Yr % Bi-Weekly to January 31, 2018, Seasonally Adjusted

[ShadowStats, St. Louis Fed]



Graph FED-5: Monetary Base – Level (1984-2018)

Graph FED-6: Financial- versus Trade-Weighted U.S. Dollar (1985 to 2018)

0

500

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2018

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llars

St. Louis Fed Adjusted Monetary Base

Bi-Weekly to January 31, 2018, Seasonally Adjusted [ShadowStats, St. Louis Fed]

40

50

60

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80

90

100

110

1985 1990 1995 2000 2005 2010 2015Fin

an

cia

l-,

Tra

de-W

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hte

d D

ollar

Ind

ices,

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1985=

100

Financial- vs. Trade-Weighted U.S. Dollar Monthly Average Dollar Indices through January 2018 Last Point is Late-Day New York for February 9, 2018

ShadowStats FWD-CNY and FRB Major Currency TWD Indices Indices, January 1985 = 100 [ShadowStats, FRB, WSJ]

TWD -- FRB Major-Currency Trade-Weighted Dollar Index

Latest TWD

FWD-CNY -- ShadowStats Financial-Weighted Dollar Index

Latest FWD-CNY [Includes Chinese Yuan]



Graph FED-7: Year-to-Year Change, Financial- versus Trade-Weighted U.S. Dollar (1986 to 2018)

Graph FED-8: Oil Prices versus the ShadowStats Financial-Weighted U.S. Dollar (2000 - 2018)

_______________

-30%

-20%

-10%

0%

10%

20%

30%

40%

1985 1990 1995 2000 2005 2010 2015

Year-

to-Y

ear

Perc

en

t C

han

ge

Financial- vs. Trade-Weighted U.S. Dollar Monthly Average Year-to-Year Percent Change, to January 2018

Last Point is Late-Day New York for February 9, 2018 ShadowStats FWD-C and FRB Major Currency TWD Indices

[ShadowStats, FRB, WSJ]

TWD -- FRB Major-Currency TWD Index

Latest TWD

FWD-CNY -- ShadowStats Financial-Weighted Dollar Index

Latest FWD-CNY

40

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50

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750

20

40

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140

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Fin

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l-W

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d U

.S. D

ollar

- In

vert

ed

Scale

Oil P

rice -

Do

llars

per

Barr

el

Oil (Brent) versus Financial-Weighted U.S. Dollar Monthly Average Price or Exchange Rate through January 2018

ShadowStats FWD Currency Index, Jan 1985 = 100 (ShadowStats, St. Louis Fed, WSJ)

Oil Price (Brent)

ShadowStats Financial-Weighted Dollar (FWD)



IV. Federal Debt and Deficit: Continuing Out of Control

―We Can Always Print Money.‖ At the time of Standard & Poor’s ratings downgrade of U.S. Treasury

debt instruments in August 2011, former Federal Reserve Chairman Alan Greenspan noted to NBC’s

Meet the Press:

―The United States can pay any debt it has because we can always print money to do that. So there is zero

probability of [U.S. Treasury] default.‖

With the net-present value of total U.S. government obligations, including unfunded liabilities, well in

excess of $100 trillion, such a circumstance guarantees hyperinflation. The outlook there will depend

largely on whether or not the new Administration will take action to bring the long-term sovereign-

solvency issues of the United States under control. That will not be accomplished easily, as discussed in

the Executive Summary. Those issues will be pursued as well in a related, forthcoming SPECIAL

COMMENTARY, ANNUAL REVIEW - PART TWO, subsequent to the scheduled February 15th release of

the fiscal-year 2017 GAAP (Generally Accepted Accounting Principles)-based reporting of the

government’s financial statements.

Various Reporting and Fiscal Shenanigans Continue to Obscure Some Growth in the Headline

Federal Debt and Deficit. There was a time, before the Panic of 2008, when the headline federal deficit

really was cash-based, cash-in less cash-out, although it still had its own reporting gimmicks. In the wake

of the Panic of 2008, however, the government opted to ―capitalize‖ some of its bailout money, instead of

reflecting it as cash-out. Not being consolidated in the federal government’s financial statements, for

example, Fannie Mae and Freddie Mac ended up paying ―dividends‖ to the investing U.S. Treasury, based

on accounting gimmicks that would have no place otherwise in an entity owned by the Federal

Government.

A separate complication was the effective monetization of roughly 78% of the U.S. Treasury’s net-public-

debt issuance in 2014 in the Federal Reserve’s quantitative easing programs. Independent of the Federal

Government, the Fed continues to hold outright some $2.4 trillion of Treasury debt, refunding the interest

it receives on that debt to the Treasury. The Fed also effectively has been helping to prop Fannie Mae and

Freddie Mac with its holdings of agency and mortgage-backed securities.

Again, the General Accountability Office (GAO)—where at one time the ―A‖ stood for ―Accounting‖—

has raised issues, in its financial statements of the federal government, as to the appropriateness of

underlying assumptions made by the Obama Administration as to the Affordable Care Act (ACA) in

annual reporting. Generally, ShadowStats has used the GAO’s alternative assumptions in assessing the

annual financial results for the U.S. Government. Even so, those assumptions have been shifting. Update

2017 detail will follow in the next several weeks. Accompanying Graph FISCAL-1 reflects headline data

through fiscal year ended September 30, 2017. Accompanying Graph FISCAL-2 reflects the ShadowStats

Estimate of the GAAP-based Total Federal Government Obligations for fiscal 2017, which obviously is

subject revision with publication of the official numbers.



Graph FISCAL-1: Fiscal-Year-End Gross Federal Debt versus Nominal GDP (1950 to 2017)

Graph FISCAL-2: Fiscal-Year-End Total Federal Obligations versus Nominal GDP (2000 to 2017)

_______________

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Gross Federal Debt versus Nominal U.S. GDP Fiscal-Year-End Debt versus Fiscal-Year GDP to FY2017

Adjusted for Year-End Debt-Ceiling Distortions [Sources: ShadowStats, U.S. Treasury, BEA]

GDP

Gross Federal Debt

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Total Federal Obligations versus Nominal GDP Fiscal-Year-End Obligations versus GDP (2000 to 2017) Obligations Include Gross Federal Debt and Estimated

Net-Present Value of Unfunded Liabilities and Other GAAP Adjustments [Sources: ShadowStats, U.S. Treasury]

GDP FY Nominal Average

Total Federal Obligations

Gross Federal Debt



V. Inflation: Destroyer of Real Wealth and Purchasing Power

Gold Still Hedges Inflation Risks. In a world where ―The United States can pay any debt it has because

we can always print money to do that,‖ per Alan Greenspan (see Section IV), and where ―Indeed, under a

fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other

agencies) should always be able to generate increased nominal spending and inflation, even when the

short-term nominal interest rate is at zero,‖ per Ben Bernanke, real world inflation is not about to

disappear. These comments also will be updated and expanded upon in SPECIAL COMMENTARY,

ANNUAL REVIEW - PART TWO.

The Federal Reserve has created a great deal of inflation in the past century, as noted in Table

INFLATION-1 and in considering the location of the blue points in Graphs INFLATION-2 to 5.

Shown in Table INFLATION-1, the U.S. dollar has lost 96.0% of its purchasing power since the Federal

Reserve opened its doors in 1914, based on today’s headline CPI-U. Based on the ShadowStats Alternate

CPI Estimate (1980-Based), as described in the Public Commentary on Inflation Measurement, the U.S.

dollar’s purchasing power as declined by 99.3%, more in line with a 98.4% decline in the purchasing

power of the dollar as measured by the price of gold, in the period after the dollar’s gold backing had been

removed fully, post 1970. In terms of potential assets for hedging against inflation, despite recent efforts

by central banks to depress prices of precious metals, holding physical gold still has more than covered

headline CPI-U inflation (as has silver) and gold largely has offset the loss of U.S. dollar purchasing

power reflected by broadest ShadowStats inflation estimate.

Consider as well accompanying Graphs INFLATION-1 to 4. There are two sets of plots. Each set is

shown with inflation plotted first using an arithmetic scale and then a logarithmic scale. The second set

includes a plot of year-end gold prices, not specifically fit to the inflation plots. Looking at the log scales,

inflation tended to rise during various periods of war, then fall back, until the founding of the Fed in 1914.

Headline CPI inflation began to accelerate and never looked back after Roosevelt abandoned the domestic

gold standard, and further after Nixon abandoned international convertibility of the dollar for gold. The

plot of the price of gold coincides with the ShadowStats Alternate Inflation Measure (1980 base) as of

December 2017.

[Table INFLATION-1 follows on the next page]




Table INFLATION-1: Historical Comparisons of Inflation Measures and Inflation Hedges (1914 to 2017)

Change in Purchasing Power of the U.S. Dollar (USD)

Through December 2017 Versus 1914 (Year the Federal Reserve-FRB Became Active),

1933 (Year that Roosevelt Abandoned Domestic Gold Standard),

1970 (Year Leading into Nixon’s Closing the Gold Window), and

2005 (Year Leading into the Debt/Banking Crisis)

Since January of

USD versus 1914 1933 1970 2005

FRB FDR Nixon Pre-Crisis

Change in Purchasing Power

CPI-U -96.0% -94.8% -88.6% -22.6%

ShadowStats CPI (1) -99.3% -99.0% -97.0% -70.0%

CPI-U Inflation-Adjusted USD:

Today's Purchasing Power, Value of

$100 Invested in Base Period: 1914 1933 1970 2005

U.S. Dollars - Held in Cash $ 4.00 $ 5.20 $ 11.40 $ 77.36

Swiss Francs - Held in Cash $ 21.74 $ 28.26 $ 50.89 $ 94.97

Silver Bullion (2) $ 137.93 $ 185.71 $ 106.54 $ 200.94

Gold Bullion $ 250.00 $ 325.00 $ 345.45 $ 242.95

ShadowStats Inflation-Adjusted USD

Today's Purchasing Power, Value of

$100 Invested in Base Period: 1914 1933 1970 2005

U.S. Dollars - Held in Cash $ 0.70 $ 1.00 $ 3.00 $ 30.04

Swiss Francs - Held in Cash $ 3.80 $ 5.43 $ 13.39 $ 36.88

Silver Bullion (2) $ 24.14 $ 35.71 $ 28.04 $ 78.04

Gold Bullion $ 43.75 $ 62.50 $ 90.91 $ 94.36

Data points reflect monthly averages.

(1) ShadowStats-Alternate CPI measure based on 1980 methodologies.

(2) Annual averages used for silver prices in 1914, 1933 and 1970.

Sources: ShadowStats, FRB, Kitco, St. Louis Fed.

[Graphs INFLATION-1 to 4 begin on the next page]



Graph INFLATION-1: Consumer Inflation (1665 to 2017)

Graph INFLATION-2: Consumer Inflation (1665 to 2016) – Logarithmic Plot

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Consumer Inflation in the American Colonies and the United States (1665 to 2017)

CPI versus ShadowStats-Alternate Inflation [ShadowStats, Robert Sahr, BLS]

CPI-U

ShadowStats Alternate (1980-Based)

1914 - Federal Reserve

1933 - Roosevelt Abandoned Gold Standard

1971 - Nixon Closed Gold Window

1980 - CPI Reporting Alterations Started

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Consumer Inflation in the American Colonies and the United States (1665 to 2017)

CPI versus ShadowStats-Alternate Inflation [ShadowStats, Robert Sahr, BLS]

CPI-U








Graph INFLATION-3: Consumer Inflation (1665 to 2017) versus Gold

Graph INFLATION-4: Consumer Inflation (1665 to 2017) versus Gold – Logarithmic Plot

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American Colonies and United States Inflation (1665-2016) CPI and ShadowStats-Alternate vs. Year-End Gold (1792 to 2017)

[ShadowStats, Robert Sahr, BLS, OnlyGold.com]

CPI-U


Year-End Gold





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Consumer Inflation (1665 to 2017) CPI and ShadowStats-Alternate vs. Year-End Gold Price

[ShadowStats, Robert Sahr, BLS, OnlyGold.com]

CPI-U


Year-End Gold







VI. Markets: Pending Dollar and Stock Market Crises, Preserving Wealth

Despite Sharp Market Volatilities, the Precious Metals Still Have Prevailed over Time. Graphs

MARKETS-1 to 9 in this section show the regular year-end plots of relative performance of various asset

classes, ranging from precious metals and oil to equities, Treasury yields and home prices. The first three

graphs involving gold, silver, oil and the Swiss franc are in nominal terms (as were Graphs FED-5 to 7

covering the dollar indices and oil).

Graph MARKETS-1: Nominal Gold Price versus the Swiss Franc (1970 to 2018)

[Graphs MARKETS-2 to 3 are found on the next page]

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Gold versus Swiss Franc (CHF) Monthly Average Price or Exchange Rate to January 2018

Latest Point - February 9, 2018 [ShadowStats, Kitco, FRB, WSJ]

Gold - Monthly Average

Gold - Latest

Swiss Franc - USD/CHF - Monthly Average

CHF - Pegged/Unpegged to Euro

CHF - Latest



Graph MARKETS-2: Nominal Gold Price versus Silver Price (1970 to 2018)

Graph MARKETS-3: Nominal Gold Price versus Oil Price (1970 to 2018)

Graphs MARKETS-4 is in nominal terms, MARKETS-5 to 9 are in real terms, deflated by the headline

CPI-U. In an ongoing period of unusual developments, including rallying stocks with a recent sell-off,

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Gold versus Silver Monthly Average Price Levels to January 2018

Latest Point - February 9, 2018 [ShadowStats, Kitco, Stooq]

Silver - Monthly Average

Silver - Latest


Gold - Latest

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Gold versus Oil (Brent/WTI) Monthly Average Prices to January 2018, Pre-1987 is WTI Latest Point - February 9, 2018 [ShadowStats, Kitco, DOE]


Gold - Latest

Oil - Monthly Average

Oil - Latest



and a broadly weakening dollar and strengthen gold prices, consider Graph MARKETS-5, which suggests

that physical holdings of precious metals provide a meaningful store-of-wealth function against inflation.

Physical Holdings of Gold and Silver Provide a Practical Inflation Hedge and Store-of-Wealth.

Although there is a chance for a reprieve from the pending, massive debasement of the U.S. dollar,

ingrained institutional pressures favor not addressing the long-term U.S. fiscal imbalances or fundamental

issues within the domestic banking system. Those pressures are not likely to be overcome until well after

the 2018 Congressional election, barring in intervening financial crisis. That means the ShadowStats

fundamental analysis of a potential hyperinflation crisis in the United States remains in play, and should

be viewed in the context of continuing high risk.

Please review Chapter 10, 2014 Hyperinflation Report—Great Economic Tumble for detailed discussion

on approaches to handling a hyperinflation crisis and the effects on various asset groups including equities

and TIPS (neither asset class would do well in the difficult times ahead). The best hedges here remain

holding physical gold and silver, as well as holding some assets outside of the U.S. dollar.

The protective hedges work, however, only if they are held through the financial crisis. As seen in trading

of recent years, gold and silver prices can be pummeled in the open markets, often by apparent central

bank interventions. Once serious dollar debasement or inflation kicks in, however, gold’s store-of-wealth

effect should become the dominant factor driving the gold price, as also would be the case for silver.

Graph MARKETS-4 plots the nominal value of physical gold versus the Total Return S&P 500, with both

series indexed to January 2000 = 100. Graph MARKETS-5 plots the inflation-adjusted value of physical

gold versus the Total Return S&P 500, with the same indexing.

Graph MARKETS-4: Nominal Gold Price versus Nominal S&P 500 Total Return Index (2000 to 2018)

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ry 2

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Nominal London P.M. Gold Fix versus the Total Return S&P 500® Index (Reinvested Dividends)

Monthly to January 2018, and February 9, 2018, Indexed to January 2000 = 100 [ShadowStats, St. Louis Fed, S&P Dow Jones Indices, BLS]

Formal Recessions

Monthly Average London PM Gold Fix

London PM Gold Fix Feb 9, 2018

Month-End S&P 500 Total Return Index

S&P 500 Feb 9, 2018




Graph MARKETS-5: Real Gold Price versus Real S&P 500 Total Return Index (2000 to 2018)

Given likely heavy U.S. dollar selling or debasement, inflationary pressures should mount rapidly, with

the inflation surge beginning with upside spikes to oil and gasoline prices, which, in turn, would tend to

fuel a self–feeding cycle. In what would evolve rapidly into a major inflation problem—the early stages

of hyperinflation—physical gold (primary) and silver remain the best hedges, stores of wealth that

preserve the purchasing power of the invested assets, as well as being highly liquid and portable. They

work as solid hedges, only if held through the currency/inflation crisis.

Shown in the Graph MARKETS-7 despite the most-popular U.S. stock indices having rallied sharply until

recently, still trading off all-time highs, gold still has outperformed both the S&P 500 (graphed) and the

Dow Jones Industrial Average, since the beginning of the new millennium. The plotted points reflect

year-end closing prices, with the indexed prices adjusted for CPI-U inflation, and with the stock-index

values adjusted to reflect the reinvestment of dividends.

Of some interest, with January 2000 as a base, real gold broke above CPI-U in 2002, while the S&P 500

measure did not do so decisively until 2013.

Real or Inflation-Adjusted Markets. In an environment with the Federal Reserve supporting the banking

system and the stock market, domestic investors have found their investment options severely limited in

recent years, in terms of finding safe and livable returns. The accompanying graphs show the monthly

average levels of equity market values (S&P 500 and the Dow Jones Industrial Average), short-term

Treasury yields, home values and gold and silver prices, all adjusted for headline CPI-U inflation.

Not too surprisingly, despite the sharp declines in gold and silver prices of the last several years, the

precious metals—traditional inflation hedges—stilled showed the strongest real returns since 2000, up

well in excess of 100%.

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Real London P.M. Gold Fix versus the Total Return S&P 500® Index Deflated by the Unadjusted CPI-U, Monthly to January 2018, and February 9, 2018

[ShadowStats, St. Louis Fed, S&P Dow Jones Indices, BLS]

Formal Recessions

Real Monthly-Average London PM Gold Fix

Real London PM Fix Feb 9, 2018

Real Month-End S&P 500 Total Return Index

Real S&P Total Return Close Feb 9, 2018



Graph MARKETS-6: Real Gold and Silver Price Indices (2000 to 2018)

The stock indices (Graph MARKETS-7), adjusted for the CPI-U just broke solidly above par in the last

couple of years. Such excludes consideration of dividends. An average reinvested, dividend yield of two-

percent would add about 37% to aggregate real return, still shy of the precious metals, again as shown in

Graph MARKETS-5 of inflation-adjust gold versus the Total Return S&P Index, with reinvested

dividends.

Net of annual CPI-U inflation, real yields on the ―risk-free‖ three-month Treasury bill and the five-year

and ten 10-year Treasury notes have been negative for the better part of the post-2010, with 10-year just

holding in positive real yield territory (see Graph MARKETS-8), pushed lower by rising inflation. With

Treasury yields forced to artificially-low levels by the Fed’s quantitative easing programs, longer-term

maturities will crash in price, as yields increasingly move higher, in response to inflation and or to

shifting Federal Reserve policies. Despite the recent hike in the federal funds rate and with rising

inflation, both the three-month and five-year Treasuries closed out 2017 in minimally positive to negative

real yields, with some recent pick-up in the last couple of weeks, not reflected in these graphs

Real home values (S&P Case-Shiller) had gained more than 70% by 2006 (Graph MARKETS-9), from

2000, but then crashed back to, but not below, 2000 levels in 2012, and now are up by something about

40% (again, these numbers are net of CPI-U inflation). Real estate is a hard asset and does tend to hold

its value against inflation, as a long-term store of wealth. Against the precious metals, however, it

generally is not quite as liquid, and certainly is not portable.

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Real Gold and Silver Price Indices (January 2000 = 100)

Monthly Average, Deflated by CPI-U To January 2018, Not Seasonally Adjusted [ShadowStats, BLS, Kitco]

Formal Recession

Silver

Gold



Graph MARKETS-7: Real S&P 500 and Dow Jones Industrial Average Indices (2000 to 2018)

Graph MARKETS-8: Real U.S. Treasury Yields—3-Month, 5- and 10-Year (2000 to 2018)

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Real S&P 500 and DJIA, Indexed to Jan 2000 = 100 Headline Index, No Dividend Reinvestment, Monthly Average to Jan 2018

Deflated by CPI-U, Not Seasonally Adjusted [ShadowStats, St. Louis Fed, BLS]

Formal Recession

Dow Jones Industrial Average

Standard & Poor's 500

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Monthly Average Real Interest Rates -- U.S. Treasury Securities 3-Month, 5- and 10-Year Constant-Maturity Yields

Minus Headline CPI-U Annual Inflation To January 2018, Not Seasonally Adjusted [ShadowStats, BLS, FRB]

Formal Recession

10-Year

5-Year

3-Month



Graph MARKETS-9: Real Home Value Index (2000 to 2018)

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Real Home Value Index (January 2000 = 100)

S&P Case-Shiller 20-City Home Index Deflated by CPI-U To November 2017, Seasonally-Adjusted [ShadowStats, St. Louis Fed]



VII. Week, Month and Year Ahead

Instabilities and Turmoil in the U.S. Dollar and Financial-Markets Continue at High Risk, in the

Context of a Faltering and Non-Expanding Real-World Broad Economy. Updated outlooks for the

U.S. economy, the U.S. dollar, gold, silver and the financial markets are reviewed in today’s Special

Commentary (see the opening Executive Summary beginning on page 2, with the Contents and links to

Major Sections and Graphs beginning on page 6).

Natural-disaster-impact from late 2017 should continue to unwind in this week’s releases of the January

2018 Consumer Price Index (CPI), Producer Price Index (PPI), Retail Sales, Industrial Production and

New Residential Construction (Housing Starts). Accordingly, headline economic details are likely to

disappoint consensus expectations.

The real-world economy is not recovering or booming as advertised, despite some distortedly-strong,

recent economic statistics, which have begun to reverse, despite heavy hype in the press of a booming,

full-employment economy, and in the context recent FOMC tightening actions and the former Federal

Reserve Chair Yellen’s recent perceptions of a ―highly uncertain‖ economic outlook.

Reporting in most series should be back to normal (allowing for hurricane disruptions and recovery),

reflecting ―unexpected‖ downtrending economic activity, by the headline reporting of January and

February 2018 economic activity, as discussed in General Commentary No. 929. Nonetheless,

misleading, recent headline details have contributed to a manic stock market, which looks like it could be

starting to unwind.

An unhappy period of market readjustment to underlying real-world circumstances looms, where Wall

Street’s proponents of a never-ending stock-market rally have parlayed temporary, nonrecurring economic

boosts from natural disasters into a year-end 2017 economic boom. Negative economic ―surprises‖

increasingly should shock the markets and the U.S. dollar on the downside. As the reported economic

downturn intensifies in the months ahead, the FOMC—under its new Chairman Jerome H. Powell—

eventually should face an ―unexpected‖ policy retrenchment, moving back towards quantitative easing.

In these circumstances, the U.S. dollar and financial markets remain at extraordinarily-high risk of

intensified panicked declines, likely in the very near term. Holding physical gold and silver remain the

ultimate hedges—stores of wealth—for preserving the purchasing power of one’s U.S. dollar assets,

during times of high inflation and currency debasement, and/or political- and financial-system upheaval,

as discussed in the opening Executive Summary. Please call (707) 763-5786, if you would like to discuss

current circumstances, or otherwise. Best wishes – John Williams

Note on Reporting-Quality Issues and Systemic-Reporting Biases. In the context of historical

background provided in Special Commentary No. 885: Numbers Games that Statistical Bureaus, Central

Banks and Politicians Play, significant reporting-quality problems remain with most major economic

series. Beyond pre-announced gimmicked changes to reporting methodologies of the last several decades,

which have tended both to understate inflation and to overstate economic activity meaningfully—as





generally viewed in the common experience of Main Street, U.S.A.—ongoing, near-term headline

reporting issues often reflect systemic distortions of monthly seasonal adjustments.

Data instabilities—induced partially by the still-evolving economic turmoil of the last eleven years—have

been without precedent in the post-World War II era of modern-economic reporting. The severity and

ongoing nature of the downturn have provided particularly unstable headline economic results, with the

use of concurrent seasonal adjustments (as seen with retail sales, durable goods orders, employment and

unemployment data). While historical seasonal-factor adjustments are revised every month, based on the

latest, headline monthly data, the consistent, revamped historical data are not released or reported at the

same time. That issue is discussed and explored in the labor-numbers related Supplemental Commentary

No. 784-A and Commentary No. 695.

Further, discussed in Commentary No. 778, a heretofore unheard of spate of ―processing errors‖ surfaced

in 2016 surveys of earnings (Bureau of Labor Statistics) and construction spending (Census Bureau).

This is suggestive of deteriorating internal oversight and control of the U.S. government’s headline

economic reporting. That construction-spending issue now appears to have been structured as a gimmick

to help boost the July 2016 GDP benchmark revisions, aimed at smoothing the headline reporting of the

GDP business cycle, instead of detailing the business cycle and reflecting broad economic trends

accurately, as discussed in Commentary No. 823.

Combined with ongoing allegations in the last several years of Census Bureau falsification of data in its

monthly Current Population Survey (the source for the BLS Household Survey), these issues have thrown

into question the statistical-significance of the headline month-to-month reporting for many popular -

economic series (see Commentary No. 669). Investigative-financial/business reporter John Crudele of the

New York Post has written extensively on such reporting irregularities: Crudele Investigation, Crudele on

Census Bureau Fraud and John Crudele on Retail Sales.

PENDING ECONOMIC RELEASES: Retail Sales—Nominal and Real (January 2018). The Census

Bureau will release its ―advance‖ estimate of January 2018 nominal (not-adjusted-for-inflation) Retail

Sales on Wednesday, February 14th. Given the coincident release of the January CPI-U, both nominal

and real (adjusted-inflation) Retail Sales will be discussed in Commentary No. 936 of February 16th.

Consensus expectations are for a nominal monthly gain of 0.2% to 0.3%. That is at or below expected

CPI-U inflation and implies an expected flat-to-negative real headline monthly change in January sales.

Given some continuing pullback from natural-disaster boosts, headline nominal January activity has a

good chance of contracting month-to-month, even before inflation consideration.

Beyond lingering distortions from insurance payments and savings liquidation covering hurricane losses,

consumer ―liquidity‖ remains impaired. Per the Consumer Liquidity Watch section, without sustainable

growth in real income, and without the ability and/or willingness to take on meaningful new debt to make

up for an income shortfall, the liquidity-strapped U.S. consumer remains unable to sustain regular, broad

growth in economic activity, including retail sales, real or otherwise.

Consumer Price Index—CPI (January 2018). The Bureau of Labor Statistics (BLS) will release its

January 2018 CPI on Wednesday, February 14th, which will be covered in Commentary No. 936 of

February 16th. The headline January CPI-U likely will be on the plus side, perhaps up by 0.4% in the

http://www.shadowstats.com/article/no-784-a-payroll-benchmark-revisions-and-reporting-biases.pdf

http://www.shadowstats.com/article/no-784-a-payroll-benchmark-revisions-and-reporting-biases.pdf

http://www.shadowstats.com/article/no-695-payroll-employment-revisions-corrections-to-inconsistent-reporting.pdf

http://www.shadowstats.com/article/no-778-november-trade-deficit-and-construction-spending.pdf


http://www.shadowstats.com/article/no-669-september-durable-goods-orders-new-home-sales.pdf

http://nypost.com/2016/04/13/census-bureau-computers-go-missing-must-be-an-election-year/

http://nypost.com/2016/10/24/census-bureau-fraud-still-running-rampant-after-probe/

http://nypost.com/2016/10/24/census-bureau-fraud-still-running-rampant-after-probe/

http://nypost.com/2016/11/21/census-numbers-are-fake-but-the-harm-is-real/



month, plus-or-minus, in the context of a monthly gain in unadjusted gasoline prices, boosted by positive

seasonal adjustments. Unadjusted year-to-year annual inflation for January 2018 should soften to about

2.0%, from the 2.1% level seen in December 2017. Consensus expectations appear to be for a monthly

gain of 0.3% to 0.4%.

Positive Monthly Inflation Impact from Rising Gasoline Prices and Positive Seasonal Adjustments.

After jumping by a hurricane-induced, unadjusted 10.7% in September 2017, retreating by 5.1% (-5.1%)

in October, rebounding by 2.2% in November, dropping by 3.1% (-3.1%) in December 2017 and now

rising by 3.0% in January 2018, gasoline prices, boosted by positive seasonal adjustments, should provide

a positive contribution to adjusted monthly CPI-U inflation of about 0.19%. Likely boosted further by

higher food and ―core‖ (net of food and energy) inflation, the headline monthly CPI-U reading could

come in around 0.4% for January 2018.

January is the last of the string months (July to January) with positive seasonal adjustments to monthly

gasoline prices, which turn negative for February through June. Given recent, unstable monthly swings in

unadjusted gasoline prices, headline seasonally-adjusted monthly CPI changes also have been unstable.

Annual Inflation Rate. Noted in Commentary No. 931, year-to-year CPI-U inflation can be estimated for

January 2018 reporting, dependent on the seasonally-adjusted month-to-month change, versus the

adjusted, headline gain of 0.55% in the January 2017 CPI-U. The adjusted change is used here, since

consensus expectations are so expressed. To approximate the annual unadjusted inflation rate for January

2018, the difference in January’s headline monthly change (or forecast of same), versus the year-ago

monthly change, should be added to or subtracted directly from the unadjusted December 2017 annual

inflation rate of 2.11%. Given an early guess of a 0.4% seasonally-adjusted monthly gain in January 2018

CPI-U, that would leave the annual CPI-U inflation rate for January 2018 at about 2.0%, plus-or-minus.

Producer Price Index—PPI (January 2018) The Bureau of Labor Statistics (BLS) will release the

January 2018 PPI on Thursday, February 15th, with detail covered in Commentary No. 936 of Friday,

February 16th. Odds favor positive wholesale inflation on the goods side of the reporting, reflecting a

combination of rising wholesale gasoline and crude oil prices in January, in the context of positive

seasonal adjustments in the energy sector.

The dominant services-sector ―inflation,‖ however, often provides some counter-move to the hard-

inflation estimate on the goods side, where services likely would be a negative contributor in the current

circumstance. Such comes particularly from counterintuitive ―deflation‖ or ―inflation,‖ reflecting falling

or rising ―margins,‖ in turn reflecting rising or falling costs. Guesstimation in that services sector remains

highly problematic, as discussed in Inflation that Is More Theoretical than Real World? in Commentary

No. 931, where, again, the services component could offset some of the positive pressures in the headline

goods inflation. Consensus expectations appear to be for a 0.4% month-to-month gain in the aggregate

number, which would be reasonable, without the gimmicked services sector.

Per the Department of Energy (DOE), unadjusted crude oil prices and wholesale gasoline prices rose

sharply in January 2018. Based on the two most-widely-followed oil contracts, monthly-average oil

prices jumped by 8.4% (Brent) and 10.1% (WTI). That was accompanied by increases in unadjusted,

monthly-average wholesale gasoline prices of 8.3% (NY Harbor) and by 9.3% (Gulf Coast). Where PPI

seasonal adjustments for energy costs are relatively positive in January, petroleum-related unadjusted






monthly price changes should have strongly positive impact on the month-to-month adjusted Final

Demand Goods component of the PPI.

Industrial Production (January 2018). The Federal Reserve Board will publish its estimate of January

2018 Industrial Production on Thursday, February 15th, with coverage in Commentary No. 936 of

February 16th. Where recent monthly activity was distorted heavily by recovery from hurricane

disruptions to petroleum production and by factors such as production of replacement automobiles for

storm-destroyed vehicles, those distortions have begun to unwind, in the context of recent, unstable

monthly revisions (see Commentary No. 932). That process likely accelerated in January 2018.

Despite relatively modest consensus expectations for a monthly gain of 0.2% or 0.3%, production has a

good shot of a pullback in January 2018, net of revisions, despite recent oil-production-boosted mining

strength, along with continuing non-recovery and non-expansion in the dominant manufacturing sector

and continued irregular volatility in winter-related utility consumption.

New Residential Construction—Building Permits and Housing Starts (January 2018). The Census

Bureau and the Department of Housing and Urban Development release the January 2018 estimate of

New Residential Construction, including Housing Starts and Building Permits on Friday, February 16th,

with detail covered in Commentary No. 936 of that date.

The extreme liquidity bind besetting consumers continues to constrain residential real estate activity, as

updated in today’s Consumer Liquidity Watch section. Without sustainable growth in real income, and

without the ability and/or willingness to take on meaningful new debt in order to make up for income

shortfall, the U.S. consumer remains unable to sustain positive growth in domestic personal consumption,

including residential real estate activity and related demand for residential construction. That

circumstance—in the last eleven-plus years of economic collapse and stagnation—has continued to

prevent a normal recovery in broad U.S. economic activity.

In line with common-reporting experience of recent months and years of extreme volatility, including

unstable revisions, January’s monthly results are likely to be unstable, heavily revised and not statistically

meaningful, holding in a general pattern of stagnation. That said, with those frequent extreme monthly

gyrations, almost anything is possible in this unstable series in a given month, despite positive consensus

expectations for the headline January monthly reporting detail.

Irrespective of the usual lack of significance in the headline detail, the broad pattern of Housing Starts

should remain consistent with the low-level, stagnant-to-downtrending activity seen in the last year. Both

Housing Starts and Building Permits showed patterns of continuing non-recovery in the context of

respective December 2017 activity down by 47.6% (-47.6%) and by 42.5% (-42.5%) from recovering pre-

recession highs (see Commentary No. 932). Such low-level stagnation is evident particularly with

headline detail viewed in the context of a six-month moving average. Again, these series remains subject

to regular and extremely large, prior-period revisions.

__________





VIII. Links to Prior Commentaries and Special Reports

Prior Writings Underlying this Special Commentary, and Recent Commentaries. Underlying this

Special Commentary No. 935 are Commentary No. 899 and General Commentary No. 894, along with

general background from regular Commentaries throughout 2017, as detailed in the next section.

This missive also is built upon writings of prior years, including No. 777 Year-End Special Commentary

(December 2015), No. 742 Special Commentary: A World Increasingly Out of Balance (August 2015) and

No. 692 Special Commentary: 2015 - A World Out of Balance (February 2015). In turn, they updated the

long-standing hyperinflation and economic outlooks published in 2014 Hyperinflation Report—The End

Game Begins – First Installment Revised (April 2014) and 2014 Hyperinflation Report—Great Economic

Tumble – Second Installment (April 2014).

The two Hyperinflation installments remain the primary background material for the hyperinflation

circumstance. Other references on underlying economic reality are the Public Commentary on Inflation

Measurement and the Public Commentary on Unemployment Measurement.

Recent Commentaries. [Listed here are Commentaries of the last month or so, plus recent Special

Commentaries and others covering a variety of non-monthly issues, including annual benchmark

revisions, dating back through the beginning of 2017. Please Note: Complete ShadowStats archives back

to 2004 are found at www.ShadowStats.com (left-hand column of home page).] These regular weekly

Commentaries are published at least weekly and update the general outlook, as circumstances develop.

Commentary No. 934-B (February 6, 2018) provided extended coverage on the January 2018 Employment

and Unemployment details, the 2017 benchmark revisions to Payroll Employment and the January annual

recasting of population, along with coverage of the December 2017 Trade Deficit.

Commentary No. 934-A (February 2, 2018) provided initial detail on the January 2018 Employment and

Unemployment details and the 2017 benchmark revisions to Payroll Employment, along with coverage of

January Conference Board Help Wanted OnLine®

Advertising, January Monetary Conditions and

December 2017 Construction Spending.

Commentary No. 933 (January 26, 2018) covered December New Orders for Durable Goods, the Cass

Freight IndexTM

and the first estimate of Fourth-Quarter 2017 GDP.

Commentary No. 932 (January 18, 2018) covered December Industrial Production and New Residential

Construction (Housing Starts and Building Permits).

Commentary No. 931 (January 15, 2018) reviewed December 2017 Retail Sales and the CPI and PPI,

along with an update on the U.S. dollar, the financial markets and gold graphs.

Commentary No. 930-B (January 8th) expanded upon the December 2017 Employment and

Unemployment numbers and Household Survey benchmarking, Conference Board Help Wanted OnLine®

Advertising, December Monetary Conditions and the November 2017 Trade Deficit and Construction

Spending, otherwise headlined in No. 930-A.



http://www.shadowstats.com/article/no-777-key-issues-in-the-past-year-and-the-year-ahead.pdf

http://www.shadowstats.com/article/no-742-special-commentary-a-world-increasingly-out-of-balance.pdf

http://www.shadowstats.com/article/special-commentary-2015.pdf







http://www.shadowstats.com/article/c810x.pdf

http://www.shadowstats.com/


http://www.shadowstats.com/article/c-2.pdf







Advance Commentary No. 930-A (January 5, 2018) provided a brief summary and/or comments (all

expanded in Commentary No. 930-B) on December 2017 Employment and Unemployment numbers,

Household Survey benchmarking, Conference Board Help Wanted OnLine®

Advertising, December

Monetary Conditions and the November 2017 Trade Deficit and Construction Spending.

General Commentary No. 929 (December 28, 2017) reviewed current economic and market conditions at

year-end 2017.

Commentary No. 928 (December 22, 2017) covered November 2017 New Orders for Durable Goods,

New- and Existing-Home Sales and the third estimate of Third-Quarter 2017 GDP.

Commentary No. 927 (December 19, 2017) reviewed November 2017 New Residential Construction

(Housing Starts and Building Permits) and Cass Freight IndexTM

, along with an expanded discussion on

underlying economic reality and the financial markets.

Commentary No. 926 (December 15, 2017) reviewed the headline November 2017 numbers for Retail

Sales (both real and nominal), and Industrial Production, along a discussion on the dampening economic

impact of business and consumer ―uncertainty.‖

Commentary No. 925 (December 13th) reviewed November 2017 headline detail on the CPI and PPI,

along with an update on the FOMC actions and the regular U.S. dollar, gold graphs.

Commentary No. 924 (December 8, 2017) discussed the November 2017 Employment and

Unemployment details and Conference Board Help Wanted OnLine®

Advertising, the October Trade

Deficit and Construction Spending and updated Monetary Conditions in November.

Commentary No. 923 (November 29, 2017) covered the second estimate of Third-Quarter 2017 GDP,

including initial estimates for Third-Quarter GNP, GDI and Per Capita Real Disposable Income, the

October Trade Deficit, Cass Freight Index and New-Home Sales.

Commentary No. 919-B (November 6, 2017) provided more in-depth detail on the October 2017 labor

detail.

Commentary No. 919-A (November 3, 2017) provided initial detail and background on October labor

data, and reviewed the October 2017 Conference Board Help Wanted OnLine®

Advertising, the

September Cass Freight IndexTM

, Trade Deficit and Construction Spending, and updated Monetary

Conditions.

Special Commentary No. 918-B (October 30, 2017) provided a more comprehensive review of the initial

third-quarter 2017 GDP detail, along with update versions of the Hyperinflation Watch and Consumer

Liquidity Watch.

Commentary No. 917 (October 26/27, 2017) reviewed September Industrial Production, New Orders for

Durable Goods, New Residential Construction (Housing Starts and Building Permits) and New- and

Existing-Home Sales.

Commentary No. 916 (October 20th) reviewed the September 2017 Retail Sales details along with the

headline Consumer and Producer Price Indices for September.

Commentary No. 915 (October 6, 3017) reviewed the September 2017 Employment and Unemployment

details, along with September 2017 monetary conditions.

Commentary No. 913 (September 28, 2017) reviewed the third-estimate of second-quarter 2017 GDP,

with a further consideration of some unusual economic reporting in the near future.

http://www.shadowstats.com/article/c930a.pdf







http://www.shadowstats.com/article/c.pdf


http://www.shadowstats.com/article/c919a.pdf








Commentary No. 910 (September 15, 2017) reviewed the August 2017 releases of Industrial Production

and nominal and real Retail Sales.

Commentary No. 909 (September 14, 2017) assessed the annual release of 2016 Real Median Household

Income, along with a review of August Consumer Price Index (CPI) and the Producer Price Index (PPI)

and an updated Alert on the financial markets

Commentary No. 908-B (September 6, 2017) provided extended detail of the August 2017 Labor and

Monetary conditions and July 2017 Construction Spending, along with coverage of the July 2017 Trade

Deficit and the initial estimate of the 2017 Payroll Employment benchmarking.

Special Commentary No. 904 (August 14, 2017) issued an ―Alert‖ on the financial markets (including

U.S. equities, the U.S. dollar gold and silver, as well as FOMC policy), in the context of historical activity

and unfolding circumstances of deteriorating economic and political conditions. Separately, headline

details were reviewed for the July Consumer Price Index (CPI) and the Producer Price Index (PPI).

Commentary No. 903 (August 7, 2017) discussed new signals of economic deterioration in terms of

political and FOMC considerations, along with headline coverage of the July labor data, M3 and The

Conference Board Help Wanted OnLine®, and June trade deficit and construction spending.

Commentary No. 902-B (July 31, 2017) reviewed the 2017 annual benchmark revisions of GDP and

related series, along with the ―advance‖ estimate of second-quarter 2017 GDP.

Commentary No. 900 (July 19, 2017) reviewed June 2017 New Residential Investment (Housing Starts

and Building Permits), and previewed the upcoming annual GDP benchmark revisions and the coincident

―advance‖ estimate of second-quarter 2017 GDP.

Commentary No. 897 (July 6, 2017) reviewed the headline May 2017 Construction Spending and the

annual revisions to same, along the May Trade Deficit, and June The Conference Board Help Wanted

OnLine®

Advertising and the May Cass Freight Index™.

General Commentary No. 894 (June 23, 2017) reviewed unfolding economic, financial and political

circumstances in the context of market expectations shifting towards an ―unexpected‖ headline downturn

in broad economic activity, along with headline details on May 2017 Real Median Household Income

(Sentier Research) and New- and Existing-Home Sales.

Commentary No. 890 (June 5, 2017) covered the negative-downside annual benchmark revisions to the

trade deficit, the May 2017 estimates of labor conditions, ShadowStats Ongoing Money Supply M3, The

Conference Board Help Wanted OnLine®

Advertising and April 2017 estimates of the Cass Freight

Index™, and the monthly trade deficit and construction spending.

Special Commentary No. 888 (May 22, 2017) discussed evolving political circumstances that could

impact the markets and the economy, reviewed the annual benchmark revisions to Manufacturers’

Shipments and New Orders for Durable Goods and updated Consumer Liquidity Conditions.

Commentary No. 887 (May 18, 2017) reported on the April 2017 detail for Industrial Production and

Residential Construction (Housing Starts), with some particular attention to historic, protracted periods of

economic non-expansion, of which the current non-recovery is the most severe.

Special Commentary No. 885, entitled Numbers Games that Statistical Bureaus, Central Banks and

Politicians Play, (May 8, 2017) reviewed the unusual nature of the headline reporting of the April 2017

employment and unemployment details.












http://www.shadowstats.com/article/c887




Commentary No. 882 (April 27, 2017) summarized the annual benchmark revisions to Retail Sales and

reviewed the March 2017 releases of New Orders for Durable Goods and New- and Existing-Home Sales.

Commentary No. 877 (April 2, 2017) outlined the nature of the downside annual benchmark revisions to

industrial production, along with implications for pending annual revisions to Retail Sales, Durable Goods

Orders and the GDP.

Commentary No. 876 (March 30, 2017) current headline economic activity in the context of formal

definitions of the business cycle (no other major series come close to the booming GDP, which is covered

in its third revision to fourth-quarter activity). Also the February 2017 SentierResearch reading on real

median household income was highlighted.

Commentary No. 875 (March 24, 2017) assessed and clarified formal definitions of the U.S. business

cycle, which were expanded upon significantly, subsequently, in No. 876. It also provided the standard

review of the headline February 2017 New Orders for Durable Goods, New- and Existing-Home Sales

and the Cass Freight Index™.

General Commentary No. 867 (February 24, 2017) assessed mixed signals for a second bottoming of the

economic collapse into 2009, which otherwise never recovered its level of pre-recession activity. Such

was in the context of contracting and faltering industrial production that now rivals the economic collapse

in the Great Depression as to duration. Also covered were the prior January 2017 New- and Existing

Home Sales.

Commentary No. 864 (February 8, 2017) analyzed January 2017 Employment and Unemployment detail,

including benchmark and population revisions, and estimates of December Construction Spending,

Household Income, along with the prior update to Consumer Liquidity.

Commentary No. 861 (January 13, 2017) covered the December 2016 nominal Retail Sales, the PPI, with

a brief look at some summary GAAP reporting on the U.S. government’s fiscal 2016 operations.

No. 859 Special Commentary (January 8, 2017) reviewed and previewed economic, financial and

systemic developments of the year passed and the post-election year ahead (see the prior section).

__________









Documents

No. 935 - SPECIAL COMMENTARY, ANNUAL REVIEW - PART ONE · Contents of today’s (February 12th) Special Commentary and Graphs are indexed and linked on page 6. _____ Three-Part Special